Sanity check on recommendations from a financial advisor

Question

Recently my wife and I have decided that we make enough money to go see a financial advisor and see how we can be smarter with our money. The most important topic we discussed with the advisor was how to best invest our money so its not sitting in cash earning 0.7% but rather keeping ahead of inflation. We are in our early 30's so we can afford to be slightly aggressive in our portfolio. We have about $200K to play with and his recommendations are:

1. $40K in a health-care related REIT managed by Griffin Capital
2. $70K in a moderate investment account managed by Horizon Investments. There is a 1.25% fee for this
3. $70K in another moderate investment account. Don't recall who manages this but I do remember the name "LG Balanced" if that means anything. There is a 1.25% fee for this that includes a "principal protection" feature to sell off if things go south real fast.
4. Maintain $20K in a checking account to handle the inflows & outflows of day-to-day living: income, mortgage, bills, etc.

Note: My advisor told me that the $140K in the investment portfolios can be withdrawn without any additional fee within a week.

This is the first time my wife and I have ever invested money in anything other than a savings account and so we are fairly paranoid as this is a lion's share of our savings.

I've done some due diligence to the best of my ability by:

• Verifying my advisor's CFP & CPA certifications are valid and in good standing with the state of California.
• He has very good reviews on yelp which is where we found him. There are only 5 but they are all 5 stars.
• He is with an independent broker/dealer called Gateway Financial Advisors which I understand is a good thing as he is not tied to pushing any particular investment vehicle. According to the advisor, Gateway has won best broker/dealer for the last 8 or so years. I'm not exactly sure where to look to verify this.
• The two $70K checks I will be issuing will be made out to "National Financial Services" and not to him personally. As far as I can tell, National Financial Services is a subsidiary of Fidelity investments -- a name I recognize.

Now to my questions that I would extremely appreciate any responses to:

1. To those of you who live and breath finance, does anything I stated above raise any red flags, or do things seem legit?
2. I've never heard of "Horizon Investments" or "LG Balanced" so that gives me some pause, but then again I'm new to this world. Would I be better served by mandating that my money be invested with a big-name investment bank instead?
3. Is a REIT a good diversity strategy?

All-in-all I'm just looking for some additional warm fuzzies from an outsiders perspective.

Thank you!

Updates in bold italic

Answer 1

I'm of the belief that, long term, fees eat away at your performance. If you chose an ETF, say VOO, with its .03% expense, and a short term bond fund or money market fund, you are going be ahead, long term. It's pretty much accepted fact that money managers are not beating the average long term.

For you to simply do as well as I do (S&P less .02%) your guy has to beat the market year in, year out, by 1.2%. Not going to happen. Yes, in hindsight, some funds have done this. Over the decades, losing funds are closed, or merged into performing ones. But, in the end, the average fund lags the average market return quite a bit. To pay someone 25% over two decades isn't what I'd recommend to anyone.

There was recently a PBS Frontline special, The Retirement Gamble, (and this link to my article reviewing the show).

I put up an image which shows the effect of 50 years' impact of expenses. The Vanguard S&P ETF, linked earlier has just a .05% fee. In my chart I show .1%, and then a total 1% or 2% fee. $447K return for .1%, $294K for 1%.

I'm painfully aware that 3/4 of US taxpayers aren't saving at all. For those that are savers, the value in learning about investing is huge. This isn't a onetime $150K saved, but the savings on just that $10K deposit. Meanwhile, before you learn this, a pay-for-his-time fee-only planner is worth it, for a meeting and first year follow up.

Answer 2

You have received much good advice, but based on 53 years investing and the first 25 getting my nose bloodied and breaking even I very strongly offer the following.

Before doing so let me first offer this caveat: I am not questioning your broker or the advice, but it is only valuable to you if history proves correct. No one, not even Bernanke can predict how stock will perform in the future. Maybe if he sees a depression.

My advice to someone new to stock investing is to purchase a index fund from a discount broker, e.g. Fidelity or Vanguard, and then study the market and economics. The Wall Street Journal and the web are my favorites. I started with a hell of a lot less than you have saved, I would not turn $200K over to anyone until you know exactly the risk and cost involved.

Also, I wouldn't depend on one person or firm to advise or manage my money. I like to balance one against the other. I do not recall different firms recommending the same stocks. One must remember everyone in the business of recommending stock or any investment is selling something and must be compensated. That's how they earn a living.

Answer 3

While you want it to grow faster than inflation, there are things like I-bonds that can carry some inflation protection with them for an idea that may make sense for part of this.

There are now some more details and I'd think this seems alright initially though I would suggest considering having some kind of on-going plan to handle periodically seeing how much more to invest here and what kind of taxes will this generate for you as taxable accounts can carry a mix of dividends, interest and capital gains that you may have to pay even though you didn't see the gain yourself.

Keep in mind that if you do go with a big-name investment bank, this could well add more fees as well as other stuff. Lehman Brothers was a big name investment bank once upon a time and they went broke. While you may want to be hands-off, I'd still suggest having some kind of timeline for how often are your investments to be reviewed and things re-allocated. Each quarter, semi-annually, or annual? There isn't so much a right or wrong answer here as much as I'd point out that one should be aware of the trade-offs in each case. If you take annual and wonder each week how it is doing, then something a bit more frequent may make sense. On the other hand, some people may well "set it and forget it" which can work as long as there is something to know about where to go if something does go broke. As these are managed investments, the SIPC check I'd make may not hold though this would be the equivalent of FDIC for deposits when dealing with securities.

The REIT can be useful for diversification, sure. You do realize that there may be some interesting taxes for you in the next few years given the nature of a REIT investment, right? The "Return of Capital" that a REIT may pass through as a REIT to maintain its tax status must distribute 90% of its net income each year that can be quite a off shoot of funds. Where would those proceeds be invested? This isn't mentioned in your post and thus I'm curious as if the REIT passes out a dividend yield of say 5% then this is $2,000/year that could go somewhere.

Answer 4

The diversification offered by the advisor can easily be duplicated at Vanguard with something like the Ivy Portfolio. Simplify it or complicate it to your liking, with Vanguard index REITs, index stock funds, international, bond, etc. Set up automatic contributions and don't watch your money like a hawk. Set it and forget it, or maybe rebalance your holdings once a year.

The main thing advisors are good for (at your level of assets) is persuading investors to stay in the market during a crash. Most investors will sell after a crash, and completely miss out on the rebound. It's human nature to be a terrible market timer. But if you can really promise yourself never to sell in a panic, then you don't need an advisor at your asset level.

Fees like "1.25%" sound like a okay deal but should be viewed in context. With an average annual return of, say, 7%, a 1.25% fee represents nearly 18% of your gain for the year. And 1.25% may be the least of your fees - what about fees when you get out of the funds? (Neat trick, huh, calling a fee "1.25%" instead of "~18%"..).

Is active management worth 18% of your yearly gain? Your advisor's fee and the active funds' fees compound year after year, because they take the fees out of your account every year (or month).