My dad's company was being solicited by this guy, Evan Vanderwey, to move all of his money over from his existing 401(k) and IRA into the fund this guy managed. My parents were about to do it, when I asked if I could just take a look at things. I had recently watched an absolutely incredible Frontline, The Retirement Gamble, in which they detail the racket that is the retirement savings industry. In essense: people's retirement are often a very big sum of money they have just sitting there, people on average are rather innumerate and easily persuaded, and those things combined attract some real predators.read more
My parents were understandably frustrated that the existing guy who managed their retirement fund had not done very well for the past 20 years compared to the S&P 500, and this was the first person who came and told them "things are not right, but I can fix it for you". Of course, he was right about one thing: things weren't right, the guy had managed to lose money in years when the S&P 500 had gone up 30%. The person who was managing their money was also, of course, charging a 0.75% AUM (assets under management) fee, which means no matter how well this guy does, he gets 0.75% of whatever is in their fund every year, which for my parents amounted to something like $4,000 per year. That's like $330/month, which I think is on the order of a damn car loan.
So for 20 years they were paying this guy $330/month to lose their money, basically, compared the market average. Well, that's just how the world works, eh, gotta spend money to make money? No. Fuck that. You can invest in these things called index funds, which literally just spread out your money into a bunch of different companies to diversify your risk. Oh, and you don't have to pay $4,000/month to use one. It's like $5/month or something and doesn't scale with how much money you have in your retirement account, it just stays flat.
The way I pitched it to my dad was like this: "ok, two options: the stock market is a black box or not. Let's handle each case, say it's not a black box and someone has figured out how to make money from it consistently. Great, now those people are probably insanely rich already, or at least they sure as shit aren't managing other people's money and taking cream off the top, they're going to be taking out millions in loans from banks and making a ton of money from themselves. So, we can reasonably conclude that the guy who is trying to manage your fund is not one of those guys. So what's the other case, ok, it's the case that the market is a black box, which means nobody knows what's going to happen when you put money into it in different ways. Sometimes you'll make more, sometimes you'll make less. But here's one constant ever since the stock market existed: over long periods of time, it goes up. If you invest $1 in 1960, that probably turned into at least $10 by 2000. All you have to do is wait. You don't try to beat the system, you just wait. This is one of those rare times in life where the more effort you put in, the more likely you're going to fuck up (unless you put a ton of effort in and studied math and finance and do this shit round the clock, then maybe you can beat the system).
So given that the system is a black box, what do you want to do to maximize your return? Minimize the known costs. What are those: AUM fees and Expense Ratios. How do you do that? Invest in index funds. Hell, if you want to cut out the middle man you can invest your money manually into the market by breaking it up among the companies in the S&P 500, but it's probably worth it just to pay some computer a rather minimal fee to do it automatically. Go Vanguard and never go back, seriously. If you don't people are profiting off of your neglect. You're giving your money away.
There are a couple of people who get this. The guy who started Vanguard (someone who is actually ideologically driven in the finance world, as rare as that is) and Warren Buffet (who I think bet like 1 million dollars to a hedge fund that they couldn't beat an index fund over a 10 year period; he won the bet).
Why does this matter so much? It could shave years off your retirement. If my parents had invested all of their money in index funds 20 years ago instead of going with the advisor, they'd have $200,000 more in their retirement (up to $900,000 from $700,000).
Some exchanges between this guy and my parents
I would guess this is pretty representative of how these conversations go between critical thinking clients and managers. I don't know if this guy is evil or dumb, and frankly I don't care. All I know for sure is he's wrong. All that was required was doing the math.
Here are the spreadsheets I put together to help convince my parents that this guy was flat out lying to them.
Hi Phil and Beth, Thanks for the time to connect last week. Our decision for Beth's funds was to use four Vanguard Index funds for both accounts, the 401k and the 403b. VIIIX US Large Cap Growth25% VEMPX US Small/Mid Blend30% VTSNX International Blend45% VBITX Shrt Trm High QualBonds? We can mix in the Bonds to the extend we wish to reduce risk. The two main priorities we identified prior to retirement are to eliminate the mortgage and accumulate/grow your assets as much as possible. The more flexibility you have in your retirement date the more risk you can take on with your portfolios. Regardless of when you plan to retire, we want to land at that point with 6 years worth of your annual investments income in a very safe place. I think we should plan to start building the safe side of the system in three years (2021). Again, having some flexibility for market conditions as to the actual year you retire will be one of your greatest allies. If the market does very well and you’re able to eliminate your mortgage quickly, you may be able to retire with no reduction in discretionary income in as early as 5 years. If the market performs below its longer term averages you may want to retire a bit later. I think the outside edge is 9 or 10 years away. For your income generator, you’ll each have two IRAs; a safe account and a larger one that is more aggressive. We’ll start the safer one in three years so we only need to talk about the growth oriented account today. You have three viable options for this pool: Aggressive – 95% stocks, 2008 crash was –50% Growth Aggressive – 85% stocks, 2008 crash was –43% Growth – 75% stocks, 2008 crash was –39% I have only a few clients in the Aggressive mix for this pool, but they do have a more sizable safe pool than I think you’ll be able to have. Because you will have no debt (including the mortgage) you can seriously consider all of these. In the longer term, the most aggressive account turns out the best. That said, you would have to have nerves of steel in a larger market down turn for that to be the case. On the other side of the coin, if the market does very well over the next five to ten years, you might feel badly if you chose the Growth account and missed out on some of what the market was producing. I’ll be here to coaching you through whatever happens – but its your investment account and you know yourselves better than anyone. There is no right answer to this question. After I’m back next week I’d be very glad to go over this again if the right answer isn’t clear. Phil’s SEP: Once you choose from the above, I recommend moving all of the SEP money into that same fund. Beth’s work accounts: I’ll match up the recommendations to the SEP choice once made. Roth IRA: I’d recommend something on the more aggressive side here. Given the elimination of debt and that we’re not relying on these funds for income – I’d like to more than double this money over the next 8 years if that is what the market will do. 85/15 seems like a good option. Thanks guys, I’ll be out the rest of this week on a back packing trip with my 12 year old son (pray for us!). I’m driving and available until the end of today. Talk soon, Evan PS: I’ll also show you the results of the Monte Carlo sim soon. It came out in the high 90s given our cash flow plan and all three of the above options. The only thing we need to add to this is our discipline to execute over the next 40 years! Evan Vanderwey President | Cornerstone Wealth Partners | 517.381.3450 2525 Jolly Road, Suite 200 | Okemos MI 48864
Thanks Evan, We spent time this weekend looking into the Vanguard funds you mentioned on Friday and were impressed by their low management fees, which are much lower than those of the 3 Matson funds you are targeting for my SEP. And in addition to the 4 from Friday, we also see these 3 that have fees a bit higher than the ones you showed us, but still much lower than Matson’s, which range from 0.74% to 1.01%: VTSMX (U.S. index): 0.14% VGTSX (Int’l index): 0.17% VBMFX (Bond index): 0.15% Friday’s 4 from you have extremely low fees: VIIIX: .02% VEMPX: .05% VBITX: .05% VTSNX: .09% Why not consider those Vanguard index funds instead of the Matson for the SEP? We’ve also seen a recommendation that we ask whether you’re a fiduciary. Are you? Thanks, Phil
Thanks Phil, I’m glad to answer these here and then I’ll suggest we talk again next week when I return. First, I am a fiduciary and always have been. The recent fiduciary law (which has again been pushed back by the lobbyists) would not have changed my paperwork or systems in the least. This is also a piece of the answer to the fees questions as well. As a fiduciary, not only am I well within bounds recommending higher cost funds in this case, I use them myself for ALL of my own investing and am confident that you are better off to do the same. I get emails and calls from Vanguard advisor services monthly reminding me that they are an option. So, why would I not personally use Vanguard to build my portfolios or to build them for my clients? Let me bullet point my answers here and I’d like to back fill this with data when I return. Can we find a time next Monday or next Thursday or Friday to go over each one in detail? I know you’ll trust my points here – but I always enjoy going through the data with clients because its a very confirming and confidence inspiring presentation. Since you asked, I’d like to do that if you are up for it. I find all the data on Morningstar and substantiate all of it in a verifiable way. Three reasons: Vanguard wants to sell clients on their active funds. Despite the branding Vanguard has as an index fund family, this side of their business is growing rapidly. As a client you would be bombarded with the result of their “winners” (always short term) on the active side. Vanguard’s international funds are laughable compared to Matson’s. They have underperformed the FMNEX by such a wide margin for 25 years that your fund balances wouldn’t even be in the same vicinity had you held them both during the same time period. They hold nearly nothing in Emerging Markets. They don’t hold any International Small or much in the Value category. Matson Money has years of history and experience in this space and their returns show it. Vanguard’s US funds, although closer to Matson’s US funds, are still behind by more than my fee which also accounts for the internal fees. The main reason for this is that Vanguard doesn’t own much if any Small Value companies here in the US. This asset class has given an average 14.9% rate of return over the long term. FMUEX holds 15% of its fund here. The engineering of FMUEX and FMNEX are superior to Vanguards separate funds as they auto rebalance not only quarterly but daily through rebalancing with inflows and outflows. Thanks Phil and Beth, Lets talk next week. Evan
Hi Evan, After much research and discussions with friends and family over the past week, we have decided to pursue a minimal fee approach with our retirement funds going forward. We’ll be setting up accounts with Vanguard this week and will be engaging a local fee-only adviser to help us meet our retirement goals. I appreciate the time you’ve spent with Elizabeth and me over the past few weeks. I wish you well with your family and your business. Sincerely, Phil
Hi Phil, It would be helpful for me, if I might be so bold, to know what the main issue was in not choosing my service. I’m confident that my approach will yield better results over the Vanguard lower fee system, indeed they have yielded far better results over the past 20 years, which I am anxious to show you. There are three main reasons our clients have beaten Vanguard’s returns – and not by a little. Trading practices. Being a structured fund and not an index fund, we net better prices when our formulas call for buying and selling. I have a Yale study that shows dramatic differences in net yields over a ten year period. Asset Classes. One of the ways Vanguard fees remain so low is because they do not own securities in many asset classes. They are specifically low on the number of holdings in Small and Small Value companies – both here and internationally. They are missing out on higher returns in these asset classes. Discipline. This one is likely more important than the first two but is harder to quantify. I’d be remiss if I didn’t list it as one of the reasons – but even if we ignored it, investors make enough return because of the first two items to more than overcome the fee difference. Please know that my email here is sent with great respect for you both and the research you’ve done. I hope that our distance apart is something we could work through and again, I’m confident that your maximized retirement income is with our two pools and higher quality funds. I’d covet one more opportunity, but I understand either way. I’m available on Thursday and Friday this week if you are. Best, Evan
Hi Evan, We can talk later this week, but in a nutshell we asked ourselves why are we switching from one adviser charging 0.75% AUM and using high-fee funds to another adviser doing the same, albeit with different funds. At this point in our lives, we don’t need active management, so to spend $4000+ per year for the AUM fee seems excessive. Moreover, the comparisons we did at Morningstar didn’t show a large difference between the Matson and the Vanguard funds (although we could see only 10, not 20, years of Matson data). The US index funds were almost identical, the international not so much but could be with the inclusion of VFSVX. These are the funds I compared: FMUEX, VTSMX, VTSAX, VIIIX, VEMPX FMNEX, VGTSX, VTSNX, VTIAX, VFSVX Phil
Some exchanges between my parents and me
Overview: at first, I operated under the assumption that financial advisors were worth having, mainly because you guys have always had one. After a couple hours of research, I realized that that’s not an assumption you can make. Option A. It doesn’t really seem to make sense to use someone who charges so much. He’s charging you 0.75% of your assets under management each year, but saying that his goal is to match the indexes, right? Read this: https://www.forbes.com/sites/robertberger/2016/12/19/the-dirty-little-secret-investment-advisors-dont-want-you-to-know/. While the article’s title is silly, it’s representative of pretty much everything I’ve read. After doing a couple hours of research, looking at dozens of sources, it seems like the best thing to do is drop the financial advisor altogether and have Vanguard manage your money, investing in their Index funds (like the ones mentioned in the Forbes article). I know I barely know anything about this, but what I found corroborated what Kevin (who has done a lot of research) has said and what was said in that Frontline episode. It’s a "set up once and forget" strategy, which means you don’t need to put any more effort than you do now. It’s also lower fees: 0.3%. I think the biggest thing: you don’t have to worry about someone (your financial advisor) messing up and losing half your retirement, or only getting 1% or 2% return when the market did 25%, like you had with your last advisor. The only downside: you won’t have someone to help you figure out where you should be putting the money you make (e.g. toward your mortgage, into retirement, etc). But, I’m sure you can find someone who can help you with this who doesn’t need to manage all of your retirement money. Option B. If you really, really don’t want to consider Option A: then I’d suggest shopping around to see if you can find an advisor who you also trust and like but also has more qualifications. You can follow the advice of NerdWallet to find one: https://www.nerdwallet.com/blog/investing/how-to-choose-a-financial-advisor/ https://www.nerdwallet.com/blog/investing/find-a-financial-advisor/ (scroll to the bottom for finding a human advisor, at places like NAPFA) https://www.nerdwallet.com/blog/investing/form-adv-how-to-get-important-info-on-your-advisor/ The recommendation is that they have a legitimate certification, like a CFP, CFA, or CPA. Option C. I started this email with what’s below, but after more and more research it just didn’t seem like the best option was to stick with a financial advisor. If for some reason you really, really think you should stay with him, you could look at the below. From what I could tell online, he doesn’t have any obvious super red flags, which is good (I looked through his ADV from the SEC website, and didn’t see anything that looked very bad like a conflict of interest, but it’s very out of date, so you should get his current ADV if you don’t have it). It does concern me that he only has a B.S. in Accounting, and his partner, his brother, only has a B.A. in Economics and Finance. The recommendation, basically everywhere I look, is that you go with someone with an actual certification, like a CFP, CFA, or CPA. Yeah, anybody can get those certifications (although they do take a lot of effort), but why not be as safe as possible with something as important as your retirement? I also came across this multiple times (http://retireearlyhomepage.com/dfa_2010.html), which talks about Matson Money charging you overall 1.08% each year for the fund (Table Two.), on top of the .75% you’re already paying the "co-advisor", Evan, so that’s a total of about 2% you’re losing to management fees. When reading Evan Vanderwey’s ADV, I did see mention of his fees as "co-advisor" fees. NerdWallet is a very good resource that you can trust: https://www.nerdwallet.com/blog/investing/10-questions-ask-financial-advisor/. Frankly, I think you should ask him all of these questions. I have some questions for you: Has he given you an updated Form ADV? "Anyone you’re considering hiring to help handle your money should readily offer a copy of the form very early in the get-to-know-each-other process. Consider it a red flag if they don’t. Existing clients should receive an updated version annually and whenever material changes are made.’ At the very least, you need to ask him these questions and get his written response: Are you a fiduciary? How do you get paid? Do you receive any type of compensation in addition to what I’m paying you? What is the total amount of my assets that is going to fees/expenses, including you as well as the Matson Money fund? Vanguard: https://www.nerdwallet.com/blog/investing/vanguard-personal-advisor-services-review/ and https://investorjunkie.com/43352/vanguard-personal-advisor-services-review/ Betterment: https://www.nerdwallet.com/blog/investing/betterment-review/ It really seems like Vanguard or Betterment are who you want to go with. Vanguard has only a 0.3% management fee, which will get you the asset allocation you want and since you have more than $500,000 you’ll get a dedicated advisor. They seem to offer everything you’re already getting, plus here’s the kicker: the expense ratios are only 0.04% for the passive index funds (which you’ll likely go with) and only go up to .12% (for active managed). Compare that to the expense ratio you have now, which is something like 1%, and the management fee you have now, which is 0.75%. We’re talking about the difference between you losing $100,000 (assuming you have $600k now) in gains over the next 10 years due to extra management fees and expenses. Betterment is also an option (having an advisor with Betterment means 0.4% in management, compared to Vanguard’s 0.3%). Since you want a person, I won’t talk about their Robo services, which do asset allocation and such for cheaper (about 0.25%). I think it’s probably worth it for you to go with Vanguard because you’re used to having someone to help you through this and their advisor service is cheaper than Betterment. A comparison is below. Comparison: https://www.nerdwallet.com/blog/investing/betterment-vs-vanguard/ Best, Joe Hi Mom and Dad, As it looks like you guys are considering managing this stuff yourself without an advisor (or maybe having an hourly advisor you could go to for especially difficult things), I asked Kevin since he manages his retirement stuff himself. I’ve attached his responses below. I think the Three-fund portfolio link looks good; I’m going to read that later today for my own education. Some of this you already know, like getting Vanguard's admiral shares instead of investor shares (lower expense ratio). Balancing ratios is not something I have spent a lot of time thinking about -- I am young enough that I am willing to ignore the safety of bonds for now and just chuck everything in the stock market. I have the impression that domestic vs international is only kind of worth thinking about, but I am also largely ignorant there. On a brief skim-through, this seems like a good primer: https://www.bogleheads.org/wiki/Three-fund_portfolio Something I would consider more important than getting your allocation %s "just right" would be getting your expense ratios low. I think I mentioned it before, but the vanguard funds I'm familiar with have two classes of investments: "investor shares" and "admiral shares". You get admiral shares if you invest 10k or above, otherwise you get investor shares, and the only difference is a lower expense ratio for admiral shares. Not sure if the 10k is the threshold for every fund. Probably your parents are talking about way bigger sums of money than this, so it doesn't matter. Also, you asked about tools -- mint is a widely-used, well-regarded investment/retirement/finance whatever tool. haven't used it myself. personal capital is another. I signed up about 10 minutes ago and am playing around with it, pretty impressed so far. I want to validate their calculations myself, but on the face of it, it seems legitimate. it's got some handy things like - it automatically pulls in everything from all your bank/whatever accounts... if you can stand to give it your passwords. scary - telling you how much your fees are screwing you (it told me my 401k plan sucks ass, which I already knew, so that's a +1) - retirement planning (I save X per month, I already have Y saved, I want to retire at Z and spend W per month, what are the odds that this will work out for me?) - portfolio performance review, comparison to standard build outs, etc - net worth calculator (lol) Just finished reading through the Boglehead link. This section was especially relevant: https://www.bogleheads.org/wiki/Three-fund_portfolio#Adequacy_of_a_three-fund_portfolio Basically, it seems like you can’t go wrong with some combination of VTSAX, VTIAX, and VBTLX (the admiral versions of the three that everyone recommends). Best, Joe