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Hello! I am hoping folks will take pity on a true financial neophyte
who is trying to help out his mom. After many years of inaction, my
mom finally met with a financial planner who she hit it off with (the
fact that the planner was about to give birth may have helped in that
regard!). My mom's circumstances aren't dire, but she has a lot of
expenses (including a recently aquired $350K mortgage she had to take
out to rebuild a vacation home in the family for many years after it
was damaged beyond repair a few years back). She is divorced and
retired and has a portfolio of about $1.3 million in various assets
(75% blue chip stocks, 20% bonds & 5% cash - the mix also includes
some mutual funds in an IRA). Her primary home probably has a value
in excess of $750K (but encumbered by above-referenced mortgage) and
the rebuilt vacation home is probably worth around $500K. After her
divorce a number of years back, she realized she needed to be on a
more structured budget/financial plan (with better diversification,
etc), but she was unable to grab the bull by the horns until now. Her
inaction was partially abetted by fact that one of her largest
holdings (a financial stock that made up approx 1/3 of her portfolio)
was growing by leaps and bounds over the last couple of decades (until
the recent setback in financial stocks). So all of that is background
for the following proposal, which she received from the afore-
mentioned financial planner (i have tried to edit it down a bit, but
kept the essentials of what she is proposing):
Investment Recommendations
IRA Funds
(approx $250,000 )
Consolidate two IRA accounts by selling and transferring funds to
[name of firm]. Invest proceeds in a variable annuity with a
guaranteed minimum withdrawal benefit. The account will be invested
in a portfolio of mutual fund sub-accounts consistent with moderately
conservative risk profile.
Required minimum distributions from annuity for the first three years
will be taken from a separate cash account (set up as part of
transaction). The amount to be deposited in the account will be
$50,000 and will be held in certificates of deposit. Payments will be
made each December for three years. During first three years, value
of the account will be recorded on the anniversary of the annuity.
Guaranteed minimum withdrawal benefit will be based on the highest
value recorded each year investment held. Guarantee is for 6% minimum
withdrawals and the cost of the rider providing the benefit is .65%.
The other cost associated with annuity is the annual .85% mortality
and expense fee. There are no charges for transactions, either for
initial purchase or when portfolio is re-balanced. An additional
feature of contract is 2% bonus to be paid at the initial deposit,
based on the total amount deposited. For example, a deposit of
$200,000 would mean a $4,000 bonus is paid and the initial principle
value is set at $204,000. While invested, 10% of the value plus any
gains are always accessible without charge, but the contract cannot be
surrendered for a period of ten years without incurring a surrender
penalty. Additional details regarding fees and charges as well as
available funds and asset allocation models are made available by
prospectus and within the account application.
Non_$B!>_(BIRA Assets
(approximately $1M)
Transfer individual stocks and bonds at [name of firm] and to managed
account at [new firm] under umbrella of 1% annual mangement fee, based
on the total balance of the account and billed monthly. The 1%
management fee covers any and all transactions and the active
management of the portfolio, ongoing. Specific recommendation is to
sell individual bonds with long duration/maturity and all individual
stocks as they are more risky than necessary to generate income
desired over the long term and are inconsistent with your investment
objectives. Bonds with short duration will be held until their
maturity dates as they have a higher yield and no call features.
Total annual yield from the bonds to be retained is approx $6,500. As
stocks and bonds are sold, proceeds to be invested as follows: to
cover remaining tax payments ($60,000), possible purchase of new car
($45,000) and kitchen remodeling ($20,000), plus cash reserves equal
to six monthly payments of regular expenses ($60,000) will be set
aside within a brokerage account and invested in CD_$B!G_(Bs and money market
funds. Monthly payments of $12,000 will be directly deposited to
checking account at local bank on first of each month. There are no
fees or charges for maintaining brokerage account for the purpose of
holding cash, as long as the total assets at [new firm] exceed
$20,000. Cash will be held in a separate account from any managed
money, so there will be no 1% fee.
In addition, it is recommended that $300,000 of proceeds from sale of
stock be invested in the [private REIT] offered by WP Carey company.
This is a private investment offering a regular current distribution
of 5.5%. The portfolio is invested in global, diversified real estate
properties and income is generated though long term leases. For more
specific information regarding portfolio holdings, distributions and a
corporate profile, please refer to the prospectus, provided by WP
Carey.
Finally, the remaining proceeds (approx $300,000) to be invested in a
diversified portfolio of professionally managed mutual funds. These
assets will be maintained in the managed account at a fee of 1% and
reviewed on a quarterly basis for the purpose of re_$B!>_(Bbalancing and or
change of investment objectives.
****end of proposal****
So there it is. Sorry for the length of this - tried to trim it
extensively without losing too much of the substance. The numbers may
not jibe exactly because they're approximations in some cases, so
don't let that bog you down. Thanks for any feedback you can provide
about how prudent the proposed course of action may or may not be
given my mother's circumstances. Sam
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s...@g...com wrote:
> Consolidate two IRA accounts by selling and transferring funds to
> [name of firm]. Invest proceeds in a variable annuity with a
> guaranteed minimum withdrawal benefit.
This is where I stopped reading. I have yet to meet a VA that I like,
but to put any VA inside an IRA is unconscionable, in my opinion.
Ok, I read a bit more. Putting 30% of the non-IRA funds into one sector,
let alone one sprecific REIT is not prudent, not diversified enough for
my liking.
A 60/40 mix of a good index fund and intermedite bonds would have a high
chance at beating the suggestion the advisor made. I'm sure other will
chime in with their thoughts.
Joe
www.blog.joetaxpayer.com
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On Sep 14, 4:53 pm, s...@g...com wrote:
> Consolidate two IRA accounts by selling and transferring funds to
> [name of firm]. Invest proceeds in a variable annuity with a
> guaranteed minimum withdrawal benefit.
This right here is an immediate red flag. Any financial planner who
proposes investing an IRA in a variable annuity is either incompetent
or, more likely, trying to line his pocket. The money is already tax
sheltered to putting it in another tax shelter is pointless. And
variable annuities have historically astronomical fees. Without even
reading the rest of the proposal, I would pass.
> Specific recommendation is to sell individual bonds with long duration/maturity
> and all individual stocks as they are more risky than necessary
Holding individual stocks is unnecessarily risky. I guess I can buy
that. But...
> In addition, it is recommended that $300,000 of proceeds from sale of stock
> be invested in the [private REIT] offered by WP Carey company.
Investing 23% of a portfolio in a single, private REIT ISN'T
unnecessarily risky? In the wise words of Majel Barrett-Roddenberry,
"Insufficient data does not compute."
--Bill
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joetaxpayer wrote:
>
>
> s...@g...com wrote:
>
> > Consolidate two IRA accounts by selling and transferring funds to
> > [name of firm]. Invest proceeds in a variable annuity with a
> > guaranteed minimum withdrawal benefit.
>
> This is where I stopped reading. I have yet to meet a VA that I like,
> but to put any VA inside an IRA is unconscionable, in my opinion.
Yeah, that makes no sense. Now, converting some of the funds outside a
tax-advantaged account to immediate fixed annuities for living expenses
can make sense, but certainly not that. If I'm reading the post right,
there's a 1.5% expense ratio. The reason advisors suggest them is that
most variable annuities provide handsome commissions for the broker.
If you had to go with an VA, something like Vanguard's selection would
better, they have much lower ERs.
<https://personal.vanguard.com/us/FundsVVAByName?Vie
w=EF>
You still wouldn't want to do that in an IRA.
For the portfolio size, the woman should go to a respected fee-only
advisor that isn't going to get working on commission. Or read a few of
the fine books out there about investing on your own through no-load,
low-fee mutual funds.
> A 60/40 mix of a good index fund and intermedite bonds would have a
> high chance at beating the suggestion the advisor made. I'm sure
> other will chime in with their thoughts.
That would be simple and effective. She's retired, so 50/50 wouldn't be
out of line either. She wouldn't be too bad off with a low-cost target
retirement fund for one-stop shopping.
Brian
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On 2008-09-14 13:53:55 -0700, s...@g...com said:
> Hello! I am hoping folks will take pity on a true financial neophyte
> who is trying to help out his mom. After many years of inaction, my
> mom finally met with a financial planner who she hit it off with (the
> fact that the planner was about to give birth may have helped in that
> regard!). My mom's circumstances aren't dire, but she has a lot of
> expenses (including a recently aquired $350K mortgage she had to take
> out to rebuild a vacation home in the family for many years after it
> was damaged beyond repair a few years back). She is divorced and
Your mother should get a lot more advice from a lot more people before
adopting that plan. At the very least, even independent advice from one
or two more "financial planners" like the one who recommended the plan
you describe would be a good idea. Then, if you observe that those
people recommend completely different kinds of products, you can be
sure that something is rotten in Denmark and move on to other
approaches. Consider, especially, consulting a "fee only" financial
advisor who receives no commissions from the products he or she sells.
I suspect one of the first pieces of advice you get will be to strike
out that annuity. The whole thing you describe smells fishy to me. Get
more advice before you act!
--------------------------------------
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which we respond. For all of the other tips and suggestions, see "FROM THE
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Paying someone 1% to invest in mutual funds just stinks, IMO. Funds
charge a fee as well - that's two fees! An asset manager should manage
the portfolio, not hire a fund to do his job in a wholesale manner -
the fund's investments are generic, not tailored to your mother's
needs, risk dispositions, and tax sensitivities. Personally, I do not
like asset managers. I had one once, for my mother - I took over the
management the second I was legally entitled to, and that very day
sold three positions in companies that subsequently went bankrupt. I
lowered the PE of 30% of the portfolio by 50% while increasing the
dividend yield on that portion by 210%. The positions in solid
companies with earnings increases, I let sit, or added to, and reduced
the number of positions from 60 to under 30. With a $400 a year Value
line subscription I did much better than the "manager" (and for free).
It was a 'sweater' for six months, then I got it stabilized, and that
portfolio is down 1.3% YTD (compared to DJIA down 12%), outperformed
last year, and it's tossing off a bit better than 6% yield on cost
basis. Some of the weaker companies are Intel, Cisco, United
Technologies, Pfizer, while some of the stronger ones are JNJ,
McDonalds, Colgate, XOM. Hey - If I can do a "Class "A"" portfolio, so
can you! Please be aware that you are not as financially
unsophisticated as you seem to believe, or as others may wish you to
believe.
One thing not mentioned so far is that $10,000 a month living expenses
is quite high for a portfolio of approximately $1.6m especially in
these times of historically low interest rates. You are asking for a
7.5% yield. It CAN be done if the portfolio is properly invested in
consistent earnings growth companies (above 6%) with decent dividend
yields, and a history of increasing their dividends. One of my aunts
had a good man working for her, and he gifted half of her portfolio to
a solidly funded university in exchange for an 11% "lifetime" annual
yield, in addition to a large tax deduction. That guy earned his 1%
for my aunt. Someone might suggest a reverse mortgage (I know nothing
about them).
You would definitely do best to shop very, very intensively for
someone with considerable education, expertise and reputation, who is
truly in love with his work and your mother's investments, before
handing over 1%. Or go to the library and read Value Line or S&P and
stick with companies with very high financial strength and solid
earnings. You MUST educate yourself sufficiently to evaluate anyone's
plan, as well as proposed stock holdings.
.
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>
> So there it is. Sorry for the length of this - tried to trim it
> extensively without losing too much of the substance. The numbers may
> not jibe exactly because they're approximations in some cases, so
> don't let that bog you down. Thanks for any feedback you can provide
> about how prudent the proposed course of action may or may not be
> given my mother's circumstances. Sam
I must compliment you on the thoroughness of your post. You have some other
replies, which seem to make sense. I will add my pet peeve: why will you
need to pay 1% management fee for $200k sitting in CDs? Ditto, probably,
with short term bonds. And, where is this adviser suggesting you draw the
line with bonds of "too long" a maturity?
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On Sep 14, 1:53 pm, s...@g...com wrote:
> Hello! I am hoping folks will take pity on a true financial neophyte
> who is trying to help out his mom. After many years of inaction, my
> mom finally met with a financial planner who she hit it off with (the
> fact that the planner was about to give birth may have helped in that
> regard!). My mom's circumstances aren't dire, but she has a lot of
> expenses (including a recently aquired $350K mortgage she had to take
> out to rebuild a vacation home in the family for many years after it
> was damaged beyond repair a few years back). She is divorced and
> retired
Maybe she should just sell the vacation home. That way her expenses
will drop dramatically and her net worth will increase.
--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
>
> Maybe she should just sell the vacation home. That way her expenses
> will drop dramatically and her net worth will increase.
>
Peter - I agree on that maybe you mention, only now may not be a good
time to sell. A reverse mortgage is a sale, but one that might
possibly provide an income stream sufficient to compensate for giving
up the house. It would provide some diversification, and possibly less
risk than a REIT, since it's selling, not buying. Depending on the
real estate market (and the financial crisis) one consideration is to
reduce spending as much as possible for the next two years, hopefully
realizing appreciation in either sale price or reverse mortgage terms.
There will also be some point in the current stock market decline
where some very good buying opportunities present themselves. A final
consideration is age of the parent, and possibly planning for a
retirement community. Short-term investment planning is an oxymoron -
"long-term" is the key. Which is where time spent searching for one
really good asset manager out of hundreds would pay off. I wonder if
you would comment on the above for perspective?
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On 2008-09-15 09:52:26 -0700, PeterL <p...@g...com> said:
> Maybe she should just sell the vacation home. That way her expenses
> will drop dramatically and her net worth will increase.
Or another possibility would be to rent the vacation home. That way her
cash flow would increase while her net worth would stay the same (an
very likely increase in the future).
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