My mother recently retired and has (aside from her substantial pension) around $1 million under investment with UBS. Her financial advisor is someone she knows and is comfortable with, and her portfolio is well-diversified. Though I don't think she's being maliciously ripped off, I'm concerned that she's paying way more than she needs to in expense ratios and fees. She's being charged a flat 1% of assets per year in advisory fees, and the funds she's invested in are all actively managed with around 0.6 % to 1.1% in expenses. As far as I can tell, all she gets for these costs is a giant 4" binder of paperwork once a year, plus someone who will personally answer her phone calls whenever she has a question. I've been trying to convince her to at least discuss moving her to something with broad diversification but lower fees (something like VASGX), but she's convinced that the only fees she's paying are the 1% per year, which she is comfortable with. I just can't get her to understand the hidden costs in the expense ratios. Any suggestions for how to convince her? (On a side note: is there an online resource you recommend for looking at historical returns of equities and funds that includes dividend reinvestment?)
My Reply
Your mother is definitely being ripped off, whether or not her UBS financial advisor sees it that way. Unfortunately, I don't know if I can be of much help here. This is much more of a psychology issue than investing issue. If your mother were mathematically inclined and willing to spend either a few hours reading my blog posts linked in "Most Important Investing Concepts" section of How To Invest or a few days reading a book like "Four Pillars of Investing" by William Bernstein then that would be enough. But I am guessing your mother is not all that mathematically inclined and probably not interested in reading random blogs or books. As you wrote, she is simply comfortable with her present setup and does not want to change it.
Obviously I don't know what kind of relationship you have with your mother and how much trust she has in you. In some cases trying to push somebody away from their financial comfort zone -- even when done for the best of reasons -- can backfire on a very personal level. Assuming you don't believe that your relationship with your mother might be threatened by this discussion, I would try to get a hold of your mother's actual investment history with this advisor and put together a spreadsheet showing the growth (hopefully, growth) of her portfolio over the years in a chart. Then I would compare the result with an equivalent Vanguard-based portfolio consisting of VTSMX, VGTSX, and VBMFX for the same time period, doing your best to make the ratios of the three Vanguard funds approximately the same as your mother's portolio's holdings of US equities, foreign equities, and bonds respectively.
You could use my investment returns charting tool for this purpose... You would use the "custom portfolio" section to specify your benchmark as a mix of US equities, foreign equities (as EAFE alone or EAFE plus emerging markets) and bonds (10-year treasury being rough substitute for VBMFX). For example, here is a portfolio that has 30% in US stocks, 10% in EAFE (foreign developed), 10% in emerging markets, and 50% in bonds for 1995-2011:
What you would do then is compare your mother's portfolio's returns to this index-based portfolio. Below the custom portfolio table on the chart page, you'll see a line that says "compare the performance of your investments to the market. Select the year you started investing" followed by a drop-down box containing the year. Use that box to select the same year as you used for starting the chart (1995 in our example) and then fill out the newly created table with contributions (if any), withdrawals (if any), and end-of-year values for your mom's actual portfolio. At the very minimum you would need to specify the initial contribution -- which doubles as starting value -- for the very first year and, assuming there were no other contributions or withdrawals, end-of-year values for every year. The end result, after updating the chart, will look something like:
This will definitively show what your mother has missed out through the years. This is a fairly involved exercise. You will need to obtain all the contribution and withdrawal information, and end-of-year statements for this chart to be meaningful -- not to mention analyze your mom's portfolio to come up with an appropriate benchmark. And there will still be no guarantee that your mother would be convinced by the resulting chart. But this is the type of due diligence all investors should do -- and I can pretty much guarantee that your mother's UBS financial advisor never even considered doing.
Finally, you asked for a good tool for historical investment returns from funds. By far the best one available to everyone is Morningstar.com whose best features are accessible without a subscription. More specifically, whenever you view Morningstar charts for a mutual fund they include fully re-invested dividends and interest by default. For example: http://quote.morningstar.com/fund/chart.aspx?t=VTSMX®ion=USA&culture=en-US You also can customize time periods being charted, down to exact starting and ending dates and compare several funds on a single chart. And if you start a plot with a mutual fund and then plot an ETF or a stock as a comparison on top of it, the dividends/interest of that ETF or stock will be shown as re-invested as well (if you start with an ETF or a stock on a Morningstar chart, as opposed to mutual fund, then you will not be able to show re-invested dividends/interest). The performance tab, such as http://performance.morningstar.com/fund/performance-return.action?t=VTSMX®ion=USA&culture=en-US will show you detailed returns in numerical format instead of graphical. There is a lot of good stuff on Morningtar.com and you should definitely explore it if you are interested in benchmarking portfolios. The only thing you should completely ignore there are the "star ratings" assigned to different funds. They are completely nonsensical and Morningstar occasionally even admits as much, but these ratings appear to be a major marketing tool for them, so they are probably not going away any time soon.
If you are more inclined to doing your own number crunching then you should turn your attention to downloadable CSV data available from Yahoo Finance. E.g.: http://finance.yahoo.com/q/hp?s=VTSMX+Historical+Prices -- the CSV download link is near the bottom of the page, below the the big table showing all the daily prices. Use "Adjusted Close" column to capture the effect of re-invested dividends and interest.
I hope that some combination of my charting tool, Morningstar, and Yahoo Finance helps you put together a convincing enough presentation for your mother to leave her advisor in favor of something like LifeStrategy (though I would go more conservative than VASGX you mentioned) -- and save around $20,000 annually as the result!
It sounds like the reader's mother may not be inclined to manage her portfolio on her own, but she is certainly overpaying for her advice and her investments. I would guess that the annual drag is something closer to 3-4% between the advisory fee, actively managed funds and tax drag (if this is a taxable account).
ReplyDeleteKnow that there are a handful of firms who think the standard 1% advisory fee is a total ripoff and are educated enough to realize the failures of active management. Some prefer DFA funds, like Evanson Asset Management or Cardiff Park Advisors (both in CA) or Bason Asset Management, my firm in Denver. Each of our firms (to the best of my knowledge) work either hourly or on a flat retainer not tied to account values.