Investment management in retirement - hire a pro or DIY?
December 14, 2019 6:27 AM   Subscribe

I'm in the final stretch of my working life and planning retirement. A good number of my similarly-situated friends have gone the route of turning over their assets to an investment manager, and generally seem happy with that decision. However, being a lifelong DIY-er, I'm undecided whether to go the investment manager route or invest on my own by selecting a few low-cost index funds or ETFs. Pros, cons, and other random musings within.

Coming down on the side of professional management: they are professionals and therefore better at this than I am; they offer products that I otherwise wouldn't have access to; I can safely ignore my investments and let the pros worry while I go plan my next vacation.

On the other hand, in the DIY camp, some experts say finance pros are mainly interested in separating you from your money, and that a few well-chosen index funds will suit your needs just as well. Costs for asset management run about 1% of assets under management per year, a tidy sum. I've seen investment managers push various investment/insurance combo products and other esoteric investments. But I'm a little skeptical as to whether these are more beneficial for me or the commission-earning investment manager.

Confession time: I have not had great results managing my assets to this point, although admittedly in the past I've strayed pretty far from the "well-chosen index funds" path. I resolve to do better in the future. I also invest very conservatively, thus getting below-average returns. I do have interest in personal finance, and have been learning more about it in recent years.

I've tried a robo-advisor with a slice of my money, and got worse returns (with a higher risk profile!) via Wealthfront than the portion I handled on my own.

I've considered engaging a fee-only planner. However, the afore-mentioned friends have had zero success finding one, so I'm not optimistic about that.

So - do I let the pros handle it? Or devise a sound plan and manage the cash myself?

I welcome all perspectives, but if you happen to derive income as a personal finance professional, please disclose.
posted by mama penguin to Work & Money (13 answers total) 10 users marked this as a favorite
Investing for retirement gets significantly more complicated later in life, not because the stocks get harder to pick (you shouldn’t be picking stocks, as you know!) but because the rules around retirement accounts and tax planning start to be much more relevant to any decision.

So, if you’ve struggled with DIY in the past, which it sounds like you have, it’s not about to get easier. And for that reason I’d consider turning things over to a pro, or at least having a pro on retainer who you talk to regularly.

If you go this route than you want an independent fiduciary planner. Whether you pay a fee to talk to them or a percentage to have them manage your assets will depend strongly on how much you have, and whether you want to hand things over to them completely (expect to pay about 1% for that) or have them talk you through your options and answer questions (I pay $125 for that). The important thing is that they are fiduciary, i.e. don’t work on commission for a bank or insurance company, they get the whole index fund thing, and that they understand the details of retirement itself. If you need advice on how to find a planner like this then post back and I’ll share how I did it.
posted by caek at 6:47 AM on December 14, 2019 [5 favorites]

With the caveat that I'm not a financial professional (but I have invested money successfully), I'd go with something like Vanguard, which is sort of a compromise between the alternatives you're putting forward. Depending on how much money you have, they will meet with you annually for free to discuss your individual strategy (there might be a reasonable fee otherwise for such a meeting? - unsure); and the fees for their funds are very low. And Vanguard has funds where you pick your retirement year (something like this one), and I believe the investment strategy gets increasingly less aggressive the closer you get to retirement. (I haven't actually investigated those funds as I'm younger and am taking more of a total-market-index approach.) Unless I knew a whole lot about the track record of a particular investment manager, it would take some convincing to go with one, as the risk just seems substantially higher. In any case, you definitely should go with some sort of broad-based approach rather than picking individual stocks!
posted by ClaireBear at 6:55 AM on December 14, 2019 [1 favorite]

I believe I am in about the same situation as the OP (both current situation and past experiences). While I was contemplating what to say caek did I very nice job. The only things I would add:
  • I believe that any planner is going to want a ton of financial information from you, when I have used one in the past I printed everything, redacted it and then faxed it to them. That may not have been air tight, but it was easier than trying to redact digital records and (hopefully) not out in the cloud somewhere. Even if I trust the planner I don't necessarily trust every employee or the people who clean their office.
  • I have a friend who retired a few years ago, and to make concrete what caek alluded to vis taxes, he did better than he expected w/r/t RMD (required minimum distribution) but worse than he expected with taxes (so he's considering moving to a different state) but luckily some of his investments were in tax exempt bonds, and so all in he claims to have more money now than when he retired because of greatly decreased cost of living (but I only have an electronic connection with him now, so I don't now how spartan a life he's leading!)

posted by forthright at 7:01 AM on December 14, 2019 [2 favorites]

they are professionals and therefore better at this than I am; they offer products that I otherwise wouldn't have access to

Nope, nope, nope. This is not true. Anyone who tells you that they have products you don't have access to is a scam artist and you should run the other way.

Do not sign up with anyone charging a 1% management fee. Find a fee-only advisor. They are out there, try harder.
posted by JackFlash at 9:37 AM on December 14, 2019 [2 favorites]

From a Mefite who wishes to remain anonymous:
Commenting anonymously here. I'm in my 50s and spent the first eight or ten years after graduating from college managing my own money, then switched to an adviser for the last 18 years. In that time I've worked with three different advisers (turnover due to natural attrition in one case and unhappiness with results in other). I've also had the chance to experiment with some self management tactics with other pots of money - have also tried the robovisor route you mentioned for a few years. Finally, my parents had their own adviser and as their health failed, I got more and more involved with that adviser. They've both passed away, all of the assets came to me, and for various tax related reasons, I'm still working with that adviser. Neither of these situations are fee only.

Variations of this question have come up on several times before and I've seen similar questions asked and answered in other forums. The go-to criteria for almost everyone is, can the adviser get me a better return than doing it myself? I'm going to skip past that and talk about some of the intangible benefits of having an ongoing relationship with an adviser.

#1 Having someone with full visibility into your investments to bounce ideas off/argue with/commiserate. I'm in touch via email with my advisers on a monthly basis and talk to them on the phone every two to three months. These calls help me get out of my own head when the markets are doing well, or poorly, or some major event has happened. By the way, neither of my current advisers live in the same city I do (to your point about having trouble finding one).

#2 Establishing a cadence. When I was self managed, one problem I found was that I would get busy with work or life and not pay attention to what was happening in the portfolio for weeks or months. Even with a buy-and-hold strategy, you still need to pay attention to things like bonds getting called in, or dividends that don't automatically reinvest, or under-performing funds. Advisers come to work and think about this every day.

#3 Networking you to other specialty professionals, like tax people, estate planners, or any other weird "I need to find someone who can do X" requests. Real example: I needed to find a trustworthy coin dealer to buy a large collection.

#4 Continuity when your health and/or mental facilities begin to fail. My mom's adviser was very helpful as her health began to fail and I took over more and more financial stuff. She was no longer able to really participate in managing her money, but there were a number of changes we made as her circumstances (and expenses) changed.

If you decide to go down this road, this might be helpful in locating a fee only planner Where-to-find-and-how-to-select -a-financial-planner
posted by LobsterMitten at 9:56 AM on December 14, 2019 [3 favorites]

DIY resource where I've gotten useful info. Some cities have local groups that meet and discuss approaches/tactics, etc.
posted by dancing leaves at 10:06 AM on December 14, 2019

Even with a buy-and-hold strategy, you still need to pay attention to things like bonds getting called in, or dividends that don't automatically reinvest, or under-performing funds.

This is really bad advice. Unless you are investing millions, you never need to buy individual bonds. You just invest in a bond fund and you don't have to worry ever about maturing bonds and reinvestment. And you never have to worry about stock dividend reinvestment either. All stock funds have automatic reinvestment. And under-performing funds? That exactly the opposite of buy-and-hold. You can't reliably pick out-performing funds.

I still recommend going to a fee-only advisor, but if you really want more handholding, at least go to a low cost advisor like Vanguard. They will handle your investments for 0.30% or less.

Anyone paying 1% for financial advise is getting ripped off. Think about it. With bonds yielding around 2% right now, you are handing over half your income to an advisor, which is nuts. And someone getting close to retirement, you should probably have something close to half your money in bond funds.
posted by JackFlash at 10:49 AM on December 14, 2019 [5 favorites]

A financial planner is a good idea for someone in your position -- but investment management in the narrow sense should be a small part of what they do for you, and the actual investment products almost certainly should be very-low-expense index funds, interest-paying cash vehicles with near-zero or zero fees and expenses, and insurance policies (although you have to watch out there).

There's a long list of things that a financial planner can do for you, just a taste of which:

* assessing your parents' and in-laws' financial condition, and the requirements from you and/or contributions to you that can be expected -- nothing blows up a 55 year olds' retirement plans faster than his 85 year old parents turning out to have no funds for long-term care or having taken a reverse mortgage that zero'd out what was expected to be a $750,000 inheritance.

* if you anticipate that your parents or in-laws, or you, or both, will have a taxable estate, the basic and easy tools to mitigate estate taxes (annual gifts, whole life insurance policies), and quarterbacking the more complex efforts with your accountants and attorneys and insurance agents

* model your income requirements in retirement, and your non-investment sources of income (social security, defined-benefit pensions) in retirement; this can also include costs of your kids or grandkids education, support for adult kids who may need down-payments for their first houses, or more serious income support, etc.

* advise you on the variety of tax-preferred vehicles that are available to you now or soon -- catch-up IRA & 401k are available to everyone 50 or older, business owners have tons more, etc.

* model your lump-sum sources of capital in retirement (sale of business, down-sizing your home)

* project out the after-tax income generation of your current retirement assets (IRA, 401k, other tax-preferred vehicles) as well as technical matters such as rollover of 401k assets to IRAs, required minimum distributions, etc.

* finally, creating a portfolio allocation and picking the funds and policies that go into it (but see above re fees) ... and yes, single stocks and bonds shouldn't likely be in it in any serious way.

All of the above said, it is not at all easy to find good hourly financial planners. It's just a bad business compared to offering wrap fees and earning insurance commissions (nobody really makes much on stock and bond commissions anymore). Be willing to pay a small asset-based wrap fee but make clear that you want any fund loads and insurance commissions fully disclosed to you.
posted by MattD at 11:44 AM on December 14, 2019 [3 favorites]

Couple of misconceptions embedded in answers here that I’d like to clear up.

First, there are plenty of planners who are not stock pickers when it comes to investment strategies. I manage my own investments according to set-and-forget index tracker conventional wisdom. But so would my planner if I turned management over to him. It’s not 1998 any more. Modern planners read the same blogs and Reddits and bogleheads pages we all do.

Second, yes, anyone paying 1% to someone who picks funds for them (or manages an active portfolio for them) is getting ripped off. But with respect, that’s a pretty serious misunderstanding of the scope of a financial planner’s job. You may not find the other stuff they do (estate planning, life insurance, tax planning, budgeting, etc.) worth the money, but comparing it to the expense ratio of a Vanguard fund is an apples to oranges comparison.
posted by caek at 5:46 PM on December 14, 2019 [1 favorite]

I strongly agree with the idea that it's not so much the question of “where do I invest my money" as all the other stuff that you’d get from having this relationship with a professional that others have already described. In the end it comes down to whether you think that is worth the fee or whether you think you can (and will) do it all as well on your own. In that sense it's the same question you (anyone) ask when you decide whether or not to go to the doctor, or to hire someone to do work on your house or car vs. doing it yourself. And that's a decision that each person/family needs to make for themselves.

I also agree that if you do hire someone, they should ideally be fee-only (no commissions) and required to work in your fiduciary interest. I would say to call the company where you currently have most of your money and maybe some of the other major investment companies (e.g. Vanguard, Schwab, and Fidelity) and see what their retirement planning offerings are. All should be willing to have an introductory conversation with you and you can see what they offer and what the costs would be. As part of that conversation I would ask how they are paid e.g. salary, commissions, % of their AUM, something else, or some combination.

There are also people who you can hire for one-time or occasional consultation at an hourly fee, though I don’t know as much about working with them or how to find them.

See my earlier answer for some resources on finding a fee-only planner.

(I am not a financial planner/financial professional myself, in case that's not clear.)
posted by 2 cats in the yard at 5:53 PM on December 14, 2019

Also my answer - and presumably most of the others - is presuming you are in the US.
posted by 2 cats in the yard at 6:00 PM on December 14, 2019

What JackFlash said.

There are a few points on which a planner can be highly useful when approaching retirement, if you don't feel you can handle this research yourself: doing some projections on what your retirement income is likely to be; explaining how to maximize your SS benefits; talking you through Medicare; helping you set up arrangements for possible future incapacity. These are services a fee-only planner can provide in an occasional one-off session.

Most of the other stuff is only cost-effective for people who anticipate having really significant assets through retirement. You hardly need ongoing advice to draft a will. If you don't have dependents, you don't need insurance except as a tax-minimization device (and that's for those who anticipate having taxable estates, which very few people do). Hopefully by the time you're nearing retirement you'll have grasped the concept of a budget.

Any non-fee-only "advisor" is going to make their money off selling you the products that make them the most money, whether that be funds that have a 5.75% front-end fee or whole life insurance policies with huge commissions (these get kicked back to the advisor in one form or another). Believe me, anything they're not explicitly charging you for they're getting paid for out of your pocket in some other form. There's a whole layer of them who are very very good at exploiting the desire of the upper middle class to feel like they're financially sophisticated.

I "manage" my mom's investments, after clawing them out of the hands of an "advisor" who engaged in many shenanigans like the ones I describe above. Two Vanguard funds and a savings account. She doesn't have to think about it at all. Now that I've cleaned up the mess, I hardly do, either. I could even automate the RMD, if I wanted. She may run out of money, but that will be because of the risks of longevity and the impossibility of predicting the future, not because of how her assets are allocated.
posted by praemunire at 8:33 PM on December 14, 2019

Agree to the above statement. Fidelity and Vanguard offer some level of assistance if you need it. But, my parents also switched the OTHER way -- away from an advisor and Fidelity offered a pretty low hassle way meeting minimal distribution requirements and the like.

For a data point, the guy - and they are usually guys -- drastically underperformed the market (VOO, ITOT) for the 35 years they did use him -- but he took his commission gladly anyways.
posted by skepticallypleased at 9:41 PM on December 14, 2019

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