Managing an account on your own vs. Broker

[janusia]

Hello. I am very confused with all of the information I am finding. I do not know anything about investing but want to start a 529 plan for my one year old. I have $8,000 to initially contribute and would like to deposit $500 into that account monthly. Am not sure what plan would work best for me. I am a NJ resident and like the fact that the NJBest is backed by the state with their "moral obligation" and that they have an age-based program. We have a friend who is a broker at Lehman and is trying to sway us into the VA American Funds. Which program would work best for us...if any. What are the advantages/disadvantages of managing an account on your own vs. a broker? Any other suggestions for plans which you would see fit for my situation would be greatly appreciated.

[bwilk]

Since you are a novice investor, having a broker for advice or counselling may be a good idea. Also, your friend at Lehman has recommended one of the highest rated plans around. American funds have a strong historical performance and low management fees. NJ is currently administered by the state and is looking for an outside manager so that may be a consideration. Also, I don't know how binding the 'moral obligation' of the state will be if the budget is $1B in the red.

You aren't limited to one account. You could open one of each and monitor them for several years and see which you like the best. Managing an account with age based investments takes nothing. The allocation is automatically changed by the program as the child ages.

[ldolan]

I too am considering the VA/AMerican Funds plan. My "concern" is that OF COURSE a broker is going to recommend this one because they make money on it. Would they recommend a TIAA-Cref plan? I doubt it. I'm looking for an advisor who works on a fee basis and would be (hopefully) completely objective. Not sure if that exists. But the above makes me a little leary of an advisors recommendation.

[bwilk]

Then do some of your own research on the underlying investments. TIAA-CREF funds underperform their peers while American funds outperform even after load in considered. I actually decided to open an account with American funds and then found a planner I felt comfortable with to get the funds rather than have the company keep it. The thing that helps American funds in comparison to other load products are the low annual fees also. There are many products out there that a broker/advisor can get paid on that are much lower quality than this one. If someone recommends a load product to you and it is not the American plan, then ask them to justify their choice.

[texascfp]

Brokers will recommend plans that pay them. One reason is that they have too, since they can only recommend products that their firms have selling agreements with. That said, there are many options to choose from, and many brokers use products that are pushed by their firm (in-house brands or companies that pay the firm for "shelf space"). Asking a broker to support his recommendation with his research is a reasonable request. A broker who presents the the VA plan with American Funds may be smart or just lucky, but the client gets a plan where 93% of the equity funds are rated 4 or 5 stars by Morningstar; no other plan can make that claim (source: Morningstar's 529 Website).

You can also pay a financial planner for advice. They will usually do a more comprehensive analysis of your funding needs, charging $250-500 for the work. Their recommendations should include direct market products (no-load)for clients that do not seek on-going advice and plans (like VA) that pay compensation to the advisor for ongoing advice an recommendations.

Good luck!

[supe]

The Morningstar reports can provide valuable info but I think some studies have also shown that Morningstar ratings have essentially no predictive ability for future performance.

My philosophy is that about the only thing that is guaranteed in any fund is the fees. And over the long run, actively managed plans (in general) have had a hard time overcoming their fees. Advisor-sold funds will likely have additional fees added onto that. That combined drag on performance becomes very difficult to overcome with time.

Another problem with actively managed funds is that they tend to suffer from taxable gains along the way due to frequent turnover. That is not an issue with a 529 plan, so they look better than they might outside of a tax-shelter. Or, not as bad.

---

To address the original question:

Personally I would use only a fee-based advisor. That at least gives you a shot at comprehensive and objective advice. An advisor that's paid by selling certain funds has no incentive to sell anything else, and even if he was extraordinarily honest, it's quite likely he doesn't even know about some other options. He has no incentive to research something that won't pay him for his time.

In my experience it's extraordinarily difficult to find a good financial advisor. I've had one who was paid by selling advise against something that was clearly a better deal for my situation. And I've had a fee-based "know it all" type completely dismiss an innovative idea that clearly made sense for me. I've also had preliminary discussions with several others who didn't know much more other than how to print out some pie charts. I've even had a well-regarded professional tax accountant screw up a tax return that was very costly to fix.

So... the way I currently look at my finances is that there is nobody more interested in my personal situation than myself, and so I've simply decided to invest the time to manage my finances myself.

And by doing it myself, I save a lot on advisor fees. So I don't have to perform as well as I theoretically might with a "perfect" advisor because I have some free money to screw up with.

All that said, if I did find an advisor that I felt was truly exceptional and whose advice I could trust without double-checking, I would retain them in an instant. The time savings alone would be considerable. But, good luck finding such a person.

[uptick29]

Supe,
I am one of those commisson based brokers and I think that it is ridiculous that you think that we advise funds to clients becasue we get compensated over funds that we do not get compensated. For your information, 75% of my mutual fund business is through American Funds. Why? Because they are the best management company in the biz. I am not driven by fees but referrals. I have a considerable amount of business that are in no load funds. Shocking? But I am driven to do the best for my clients and that means trying to get the best product out there. Because what they will give me in referrals out weighs the commission that I receive. Without referrals, my new business would dry up.

You should be careful of making a blanket comment on a profession when not everyone is like that. Yes there are some bad apples, but there are bad people everywhere. You just need to associate yourself with people that are looking for your best interest. It is possible.

By the way, do you work for free? Why do you not get a medical journal and become your own doctor or get a law book and look up a couple of cases and then you can give yourself some legal advice.

There are always people that THINK that they can do it themselves. And those are the people that I do not want as clients. I want the people that want and need help and do not think that every decision is driven by commissions.

That is why I love my job. I CHOOSE WHO I WORK WITH.

[uptick29]

By the way, I am a independent broker and I can sell any funds that I see fit.

[texascfp]

JMarks:

You appear to be a new poster here, so I would ask that review the many previous debates about commissions and advisors before sending another thread down that path. This board generally adopts a more gentle approach to voicing the many valid philosophies adopted by people in managing their money.

As a fan of American Funds you will find many kindred spirits here.

[uptick29]

TexasCFP,

Freedom of speech. And I really could care less what others have posted on this topic. I voiced my opinion on what that particular poster posted. Thanks for the heads up.
What are you doing up at 3 in the a.m.?

[dopps]

Well, well said, Jmarks! This message board is for opinions, be they mild or strong. The mere fact that it is so heavily used indicates that there is a great deal of confusion surrounding the many subtle points of 529 investing, which makes a strong argument for why a good broker could be valuable for this type of planning. This message board is a great resource for do-it-yourself'ers and professionals alike, but perhaps the complexities of 529's are too much of a challenge for some do-it-yourself'ers and these people may want to consider getting advice (which a good advisor deserves to get paid for).

[seidenbomb]

I am also a broker. If we make recommendations with the sole purpose of making a commission, we won't be around for much time, becuase clients aren't stupid. It's very easy for clients and prospects to go to morningstar and gather fee and performance info for a set of funds that pay loads vs ones that are non loaded.

With that said, I think the performance in the stock market over the last 3-5 years would be the best indicator of whether or not one should use an advisor. Many investors who did it on their own in the late 90's now have nothing or pennies on the dollar so to speak... many no load funds are no loads for a reason. they hire young, inexperienced managers to run the money. In the period of 1998-2000, data indicated that the avg no load money manager was under 30 years old. That means the avg no load manager in 1999 was in the single digits (age wise) during the last extended bear market. Load companies go out and pay managers with years of experience to manage money. Does this always translate into results. No. But i'd rather have someone who has 30 yrs (they have seen wars, recessions, oil crisis, bear markets etc) of experience managing my money then someone who is 30 yrs old.

Of course if one were to simply buy an index fund, you would want to go the no load avenue. And I also have clients with no load funds.

So, i would advise going to a financial advisor, gathering info on a few plans, and picking one. American funds are exceptional and are lower cost then other load funds. FA's generally are not bad, they generally try to help, and there are some Fa's out there that give us a bad name. CNBC does the profession no justice

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mbs

[supe]

jmarks, no, I certainly wouldn't expect any advisor to work for free. That's precisely why I'd prefer a fee-based advisor to a commission-based advisor.

If a commission-based broker recommends a fee-free fund, then he IS working for free. To put the same question back to you, why would you want to work for free?

It seems like a basic conflict of interest issue to me. I want my advisor's compensation independent of what they recommend.

[bwilk]

supe,

Just a few quick thoughts:

Commission only brokers can pass the Series 66 test and be paid for their advice on managing money/assets under management not just per transaction.

Fee based advisors get a fee for their advice, but also are paid commissions on the products they sell. I was one.

Fee only advisors are not paid commissions, but I have heard some may be doing the assets under management approach which seems in the gray area to me.

[user_660]

Supe says: jmarks, no, I certainly wouldn't expect any advisor to work for free. That's precisely why I'd prefer a fee-based advisor to a commission-based advisor.
If a commission-based broker recommends a fee-free fund, then he IS working for free.
----Not true!

To put the same question back to you, why would you want to work for free?

It seems like a basic conflict of interest issue to me. I want my advisor's compensation independent of what they recommend.
---It is!

A lot of people talk about cost/fees/expenses. The "cheapest" or least costly way to hire an advisor is via commissions... not fees!

(I am in no way saying commissions are better or worse than fees for getting advice. I am making the point that these comments are completely unfounded)

[uptick29]

Supe,
Obviously you really do not know what you are talking about about. But that is fine. I do what is best for the client. If I advise a client to invest in a no load, it is because that is best for the client. I will definitely get referrals from that person. Pay it forward. I obviously do not work for free.

Supe,
How do you feel about a management fee say 1%of a 100k portfolio, in a 3 year bear market every year. That goes straight to the broker. I love hearing the line, "as you make money I get a raise. So I have every interest in doing well by you."
WHat a load of crap that is. I do well by my clients to retain them and get referrals. That is how I make money.

That is my opinion. I feel like there is a right advisor, be it fee based or commission based, for everyone. As long as you get the advice from someone that you trust and have a good working relationship with and actually advises you and doesn't sit back and watch the market. I think that everyone needs help and if they feel that they do not then that is their choice.

Good luck to all in finding a PROFESSIONAL to work with. AND PLEASE STOP WATCHING SUZY ORMAN.

[mark]

I found an interesting post about advisors from someone who used to be in the field at another web board (Vanguard diehards on Morningstar). I am not an advisor but would like to hear other's response to this. Is this simply a matter of some advisors give the field a bad name? The rest of this post was cut and pasted from there:

One issue that everyone is looking at is breakpoints on front-end commissions. This is when an investor puts a large amount of money in one fund and gets a lower commission rate. For example, let's say a mutual fund has a 5% load. An investor who puts in $100,000 may pay only 3%, and an investor who puts in $1 million may not pay any commission. Those are breakpoints.

There is nothing wrong with breakpoints. In fact, they are good for investors. The problem rests with the brokers. Reps SELLING funds with breakpoints know where those breakpoints are, and many intentionally AVOID hitting them by diversifying a client's account across several different fund families. This ensures the broker makes a maximum commission on all dollars invested.

"Unethical!" you say? Ha! When I was a broker at a large, well know firm, I received INSTRUCTIONS on how to do this and make the client feel good about it. "It would be imprudent for an investor to put all their eggs in one basket", and again, "Some fund companies are good at bonds and some are good at stocks. An investor should pick the best fund for each asset class."

Another trick is to recommend variable annuities to high net worth clients. These products have no breakpoints. Every dollar invested earns the broker the same high commission rate.

As a broker for 10 years, I learned all the tricks. It is a disgusting business.

[user_660]

You are still dealing with the few bad apples, so you can't condemn the whole profession.

The compliant broker would inform his/her client of the breakpoints and if the broker felt money should be at more than one fund company, the broker would inform the client of the pros & cons (more diversification vs lower upfront sales charge)

Then the client makes the final decision.

Its a bunch of nonsense because there are "tricks" in every business.

[rube]

As someone who passed the Series 7 only a year ago, I can assure you the concept of breakpoint sales was thoroughly explained, thoroughly tested, and thoroughly discouraged. It is flat out illegal to advise a client to put in an order that misses a breakpoint without explaining to them about breakpoints, and it would be unlikely for someone to be able to pass the test & become a broker without learning this. If some firms do it anyway, especially on an institutionalized basis, they better hope no memo or email about it ever reaches a sharp attorney, and no disgruntled broker ever blows the whistle. Nevertheless, I'm sure it still happens.

Of course it can be a disgusting business, since criminals go where the money is. A colleague recently brought in a client from a major brokerage, 82 years old with no heirs, whose investment objective was listed as "Aggressive Growth". Peeked through her statements and saw a lot of churning in tech stocks... we advised her to see an attorney about it but she declined.

[uptick29]

That is why I say "you need to diversify and not put all your eggs in one basket" I use the whole pyramid of funds,from American funds usually. I diversify from within the same fund family.

That guy is just a bad seed that is no longer in the business. Wonder why? Again, associate yourself with a reputable advisor. That means that you need to be educated about the advice that you are getting. If the individual is a commission based broker and they are not talking about breakpoints and you have a large sum of money, then that is a red flag. I disclose all brkpts, ROU's and LOI's. I guessed I was raised on morals.

It happens in every business. You need to be careful.