Hiring a Financial Advisor: Don't Settle for 1% Fee
As you all may know by now, I listen to the Marketplace Money program on public radio every week via their podcast. It's a great program. It always has interesting topics and their economics editor Chris Farrell always uses plain English when he answers questions. Chris Farrell recently started a blog Getting Personal where he answers one question a day from listeners. Unlike me who tends to write too long, Chris' answers are short and to the point.
Occasionally, I disagree with his answer. Back in February a caller Sue asked about finding a financial advisor after she inherited $1 million. She said she'd like to get some professional help because she and her husband were not familiar with investing. She contacted a financial advisor through referral from NAPFA but she was scared by the 1% fee the advisor charges. If you have RealPlayer, you can listen to the Q&A online .
When the host asked whether Sue would be comfortable implementing a plan herself if she gets a plan from a fee-only advisor, she said yes and she would like to do annual checkups with the advisor. Chris told Sue she will have to pay some fees and that 1% fee is normal. It's not. Paying 1% fee every year ($1 million * 1% = $10,000) for investing $1 million is outrageous. If Sue invests her $1 million with Vanguard, she gets Flagship Services immediately. She can get a financial plan, annual checkups, and telephone consultation from a Certified Financial Planner at Vanguard for FREE.
TFB's Stumbles: Week Ending March 28, 2008
Here are some interesting articles. Some are from last week which I didn't have room to include.
What Moves Mortgage Rates? (HSH Associates) – Excellent article from HSH Associates on what determines the mortgage rates. If you are in the market for a mortgage, their free weekly e-mail newsletter Market Trends is very helpful.
Things Can Always Get Worse (MFI Diary) – Magic Formula Investing is doing very badly since last year, but this blogger is still hanging on with discipline. In his own words, » Read more …
SmartyPig: A Simpler Way to Save Or A Fee Trap?
[This post first appeared as a guest post on Free Money Finance on March 19, 2008. Last updated on March 26, 2008 with two footnotes. This is NOT a "sponsored" post. I've had no private contact with anybody related to SmartyPig. ]
Smarty what? That was my first reaction when I read about SmartyPig on Netbanker . It sure has a catchy name. What's it about then? From SmartyPig's web site :
"SmartyPig is a simple, smart, fun way to save for a specific goal. Using groundbreaking technology and the latest in security standards, SmartyPig allows you to invite family and friends to contribute to your account, gives you additional incentive boosts from top retailers who sell exactly what you’re saving for AND *4.30% (APY) interest on the money you’re saving."
Uncover The Hidden Fees In Your 401(k) Plan
Marketplace Money, the personal finance program on public radio, had a segment on 401k plan fees a few weeks ago. The host Tess Vigeland interviewed pension consultant Matthew Hutcheson, who said 90% or more of all the 401k plans pay 3-3.5% in fees. Here's a quote from the transcript:
Vigeland: How high do some of these costs go? Are we talking 3 percent? 5 percent?
TFB's Stumbles: Week Ending March 21, 2008
Market volatility continued. The Fed cut interest rate by 0.75%. The market wanted a 1% cut. For the first time, the Fed dared to give the market less than what they demanded. I added some money to my stock funds last Friday. The shares I bought are up 3% already. Not bad for a short week. We will see what happens next week. I still haven't decided whether I should go beyond my 60/40 allocation. So far I'm just adding to the stocks side to keep up with the market.
These are the interesting articles I came across this week:
Countrywide suspending equity lines of credit (QueerCents) – Proof that a HELOC can be pulled unilaterally by the bank, sometimes right before you need it the most.
The Case Against Roth 401(k)
To Roth or not to Roth, that is the question. Starting in 2008, like many other employers, my employer also started offering the Roth 401k option in our 401(k) plan. This question of whether one is better off with contributing to the Traditional 401k or contributing to the Roth 401k has been the subject of a lot of debate. Although there is no one-size-fits-all answer, I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k). I will state my case against the Roth 401(k) in this post.
The basic premise of a Roth 401(k), and to some extent a Roth IRA, is that of prepayment. You are prepaying the tax now so you don't have to pay tax later. This prepayment concept is not uncommon. For example, buying a season ticket is prepaying for the individual events. Buying a timeshare is prepaying for vacation accommodation. Whenever we deal with a prepayment scheme, we have to assess whether prepaying is "worth it." The same paradigm also applies to Traditional versus Roth 401(k). There are several factors that make prepaying the taxes now not worth it.
1. Fill in lower tax brackets in retirement. I showed in a previous post Commutative Law of Multiplication that if the marginal tax rate at retirement is the same as it is now, the Traditional and Roth 401(k)'s are equivalent. If the marginal tax rate is higher now than in retirement, one is better off contributing to a Traditional 401k. If the current marginal tax rate is lower, one is better off contributing to a Roth 401k. But that applies only to the marginal dollar, which is the last dollar you can shift between Traditional and Roth 401(k). It is not necessarily the case for the entire contribution or the average dollar. The tax system in the United States is progressive and it will probably stay that way. That means that income is taxed at increasing rates as it goes higher. Even if you think the marginal tax rate in the future will be higher, there will still be lower brackets and these lower brackets should be filled with money from a Traditional 401(k).
Book Review: When Genius Failed
I read the book When Genius Failed: The Rise and Fall of Long-Term Capital Management a long time ago. I re-read it last weekend in light of the recent news about the failure of hedge fund Carlyle Capital Corp. and the Fed's emergency loan to Bear Stearns. After I finished the book, news came that the Federal Reserve organized the sale of Bear Stearns to JPMorgan Chase for $2 a share (Bear Stearns closed last Friday at $30 a share). This is very similar to the story of Long-Term Capital Management 10 years ago. History has a habit of repeating itself.
TFB's Stumbles: Week Ending March 14, 2008
It was another eventful week in the stock market. The Fed offered to lend up to $200 billion to banks and Wall Street firms on Tuesday. It gave an undisclosed amount of emergency funding to Bear Stearns on Friday. According to this Bloomberg article, it is "the largest government bailout of a U.S. securities firm." It's time to re-read Roger Lowenstein's book When Genius Failed: The Rise and Fall of Long-Term Capital Management.
I've been busy buying stock funds. I'm thinking of over-rebalancing beyond my 60/40 stocks/bonds allocation. I think this is the time to tap the batteries I've been charging for so long.
Meanwhile, here are the interesting articles that I came across this week. » Read more …
Schwab AMT Tax-Free Money Market Funds
Charles Schwab started offering AMT tax-free money market funds. I read about it in the spring 2008 edition of Schwab's On Investing magazine. AMT tax-free money market funds are good for investors who are in a higher tax bracket due to the Alternative Minimum Tax, especially those who also face high state income tax.
Previously Fidelity is the only place I know that offers this kind of funds. Schwab now offers one national and four state-specific (CA, MA, NJ, and NY) AMT tax-free money market funds. The national fund and the NY fund also have two share classes with different expense ratios. The Value Advantage share class is cheaper but you can't use them for automatic sweeps. Investors in MA and NJ only have the more expensive Sweep Shares version, while investors in CA only have the non-sweep version. Like the comparable Fidelity funds, these AMT tax-free money market funds all require a $25,000 minimum initial investment.
Here's the complete list of Schwab's AMT-free money funds*:
Fed Opens the Vault
Make it 3 for 3. Yesterday I said the Fed might come out with an emergency cut after the stock market dropped below the previous low. Well they didn't do exactly that but they pulled out something else. They are going to open their vault and let banks borrow against the mortgage backed bonds they own. The banks have plenty of those but their values keep falling. This move is going to stabilize the market for a while until the market becomes desperate again. The Dow shot up 400 points! We shall see if it really works.
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