I have mentioned in previous posts that I was seriously considering hiring an investment advisor (as part of a long term strategy to hire a financial advisor in general).
The overall reasons were:
1. Nuetral third party advice and criticism
2. Provide the discipline to stickto a diversified investment plan and rebalance frequently
3. Help me avoid impassioned short term mistakes, such as single stock bets (like SNDA)
While reading William Bernsteins the Four Pillars and hearing from friends about the DFA funds and their incredibly broad inventory of inexpensive passive index funds I was even more motivated.
Virtually all of our retirement monies currently sit in Charles Schwab's 2040 retirement fund SWERX. While slightly beating the S&P 500 this year, it is still composed of actively managed funds. Over time, it's not likely to beat the relevant indexes. Furthermore, I'm paying expense ratios of about 1% (plus the invisible costs of market impact, transaction costs incurred by the fund, bid/ask spread, etc...). What I did like about SWERX is that it should automatically rebalance allocations based on my age - a big failure of mine has been avoidance of rebalancing. Also, it would automatically diversify our investments. However, their underlying funds are active and there is not enough transparency to incorporate their fund holdings into a single asset allocation strategy.
Using an adivsor would cost me anywhere from 0.25% to 0.6% to 1% of assets under management. However, as my investible assets under management are still under $500k, I would be hit by minimums cost $2000 to $4000 per year, which would push my advisory fees into the 0.5% to 1% range if I looked at those under 1%. Quite honestly, the numbers bother me. Inexpensive passibly management funds have low expense ratios, most domestic would be 0.35% or lower with international up to 0.7% depending upon the size of the asset class (small vs. big). Overall, the expenses would be very cost competitive with what I have right now, until the minimum fees are factored in. Assuming we save from $50k - $100k per year, we still would have about 3-4 years or minimum fees. Then again, maybe that isnt' a big issue in light of the fact that we'll keep our money under management for many more years (30 + depending upon mortality).
Here's my question for you: Does it make sense to bite the bullet for 2-3 years with higher expense ratios until our asset size causes the minimum fees to approach the standard percentage? Or should I try managing it myself, hoping that I'll rebalance, or do nothing, keeping the money in the life cycle funds?
Considerations for moving to an advisor right now:
1. We can afford the extra expense out of after tax savings and it won't impact our life styles
2. The improvements in investment products (lower expense rates, less actively managed)
3. Better asset allocation
4. Rebalancing performed reliably
Against going with the advisor right now:
1. We may pay as much as 0.4% extra than we are paying now for three to six years - about $1600 extra per year - a total of $4800 - $9600.
2. We may have to move accounts to different brokerage firms - lots of paperwork - in order to enjoy the custodial services needed by our advisor and have access to DFA type products.
3. Giving up my own active management / active hand in investements (maybe this should be in the pro list for advisors?)
I have a feeling a good advisor, better allocation strategy, regular rebalancing, access to professional advice and thought will probably be worth the $1600 we would spend each year.
What do you think?