My dad is better at picking good beer than he is picking investment advisors.
Yesterday we met with his investment advisor and began with an account review. Beverly (not her real name) spent about ten minutes talking up their genius-wizard fund managers, how they’re recruited and that they only choose the best of the best. She explained how these ‘super smart’ people set the quarterly investment strategy and then each account is tactically adjusted to follow the big strategy recommended by the smart people at the top.
Ugh. But I played nice, asking, “what kinds of strategies?”
“Well most recently, we decided to underweight Europe for example” she explained.
“So geographic.” I restated.
“Yes and we go by sectors too.” She added. Then she quickly shooed us onto the performance review. We looked at a chart of portfolio value over a year. “It’s up 4.5%!” she said with forged enthusiasm.
(An investment of half VTI and half BND would be up 9%. )
She saw the look on my face and quickly explained that part of their strategy is defensive. Then she pulled us fully into bizarre town.
“We know you don’t want too much volatility.” She said. “Imagine that your portfolio lost 50% in a year. Now you have half of what you started with.”
She continued, “but NOW, in order to get back to where you were, you’d have to get a return of 100%. That’s a long way to go.”
I bit my lip, and thought to myself, ‘Are you f-ing kidding me lady? Do we look like second graders? This is Emotional Fear Mongering. A drop of 50% in a year is unlikely. Plus, over a longer investment horizon the market has demonstrated that it recovers in time and in fact grows.’
I asked why they had my dad in about 24 mutual funds.
“Oh, well, say we decide we want to increase exposure in say, Europe. We’ll buy a few funds that focus on that. We pick the best fund managers and get them all working for us on the account.”
Yes we were squarely in crazy town. They buy three different mutual funds to cover one sector?
I asked about the fees.
“Your dad’s ‘strategic portfolio investment account’ has a fee of .4%,” Beverly answered. “Per quarter”.
I couldn’t stop myself. “So you are telling me that, on top of the fees within the mutual funds, which, by definition, are managed, you are charging 1.6% per year too? That means he’s paying over 2% in management fees. Do I have that right?”
“Well, I don’t know the exact fees are in the mutual accounts.” Beverly replied. “But yes that could be the case.”
“I can tell you that most are around .5% but I didn’t check all of them as there are 24 in there. And even so, I’m not sure I had access to all of the fee information. I was hoping to get that from you.”
“It should be in his quarterly statement,” she said. “I’ll print you a copy.” Beverly swiveled around to her computer and the printer fired up. As it printed, she explained that these mutual funds weren’t available to just any investors. They are special funds available to select institutions like hers.
“Mental Institutions” I thought.
She pointed out to my dad that the investment strategies are included in the statement and walked him through more of the ‘smart thinking’ of the fund managers.
Oh it was difficult to keep my mouth shut. But I had to. For one thing, I was there to learn. I wanted Beverly talking. Plus, my dad really likes these people. My parents have a safety deposit there and they like banking in person. Many of the employees greeted my dad by name. One even chatted with us before our meeting with Beverly. He and my dad seemed like old friends. He even complimented my dad on an op-ed piece my dad had recently submitted to the local paper.
Beverly moved on to dad’s retirement analysis. Absent our absolute certainty on a few data points, she put in very conservative estimates. For example, she assumed no COL increases on my dad’s pension. I looked at the folder she had open. His pension details were right there. I didn’t see any COL info on it. So I just let her do her thing.
She assumed what I thought was a high monthly expense estimate, and maxed out COL increases on that spending over time.
Running the simulation, she showed us dire results: my dad has a zero percent chance of having money at 92 years old. He sat up straight.
She was fear mongering again. Then she said, as she typed in some new numbers, “If you give us the money just sitting in your savings account, and let us invest it for you, we can get you to a …” she ran the simulation and showed us the ’success dial’ – “oh that’s a 40% success rate.”
Dad reached over and studied the pension details. He found the pension amounts from one year to the next and said, “we do have a COL adjustment.”
“Oh! She perked up – let’s add that in.”
The success rate went up slightly.
Again she mentioned the cash in dad’s savings account. I told her we’d consider investing it. Of course, I’d advise my dad to invest it elsewhere – but I kept that detail to myself. I’d heard enough, so I asked my final questions.
“What other products do you have to offer my dad that are less actively managed and incur lower fees?”
She hesitated and then said, “Oh, we have lots of products.” Then, boldly, she proceeded to talk up the wisdom of the money managers and that she has my dad in the best account for him! She never answered the question.
I looked at my watch. “Wow! You’ve spent an hour and fifteen minutes with us, Beverly! I’m sorry we’ve taken up so much of your time. Time for that beer now dad?”
“Sure!” he perked up. “Let’s go” He explained to Beverly how he’d found this Lucile IPA at a bar a block over and just knew I’d love it. And so we headed over. I DID love the beer.
Update February 2015: Mom and I moved some of that savings account cash into a Vanguard account. It’s allocated across VTSAX, VGTSX, VTIBX and VBMFX. Yeah! It’s already up 4%.
The investment account? Not so much.