Financial Services -- or --
"How We Got from a Full-Service Broker to Doing it Ourselves"
(written: January 2007; last modified: 9 August 2014)

Back in 1980 I became aware of a program offered by Merrill Lynch. The exact name escapes me, but the gist of it was that $25,000 would establish an account that provided a brokerage account, a money market account with free checking, and a single statement that would show all my holdings. The initial $25,000 could be met with any combination of securities and cash. I had become very disillusioned with bank services and fees and this looked pretty good to me. I was referred to a Merrill Lynch stockbroker (we'll call him Stan) by a colleague. I explained to Stan that I didn't want to be bothered with sales calls. If I wanted something, I'd call him. I funded the account with my IBM stock and set up the money market account with the balance from my old bank checking account. I had my pay checks automatically deposited. Over the years, as my savings grew, I started thinking about expanding my portfolio, eventually adding several mutual funds and individual stocks that Stan recommended. Since I viewed investing as pretty complex, I felt I needed an "expert" to help me out. For over 20 years this arrangement seemed to work quite well. The value of my accounts grew substantially, Stan became more like a friend and advisor, my financial future would be secure! What I didn't realize was exactly how much this "free" program was costing me. Sure, I paid brokerage fees whenever I bought or sold anything, but I rationalized this expense as a way to reduce my basis for tax purposes should I choose to sell. What I would come to find out is that the "no-load" funds I was buying were really back-end loaded and, in addition, their expense ratios were pretty high. But I'm getting a bit ahead of myself.

When I started thinking about retirement, my first question was: "How am I going to get my money out?" This led to questions like: "How do I make sure I have enough to last me through my retirement years?" and "How do I plan for all this?" So I asked Stan. My account by now was fairly substantial and I was offered a full financial plan. My recollection is that I paid $250 for this. It was based on my account balance at the time, my current and projected income, my tolerance for risk, and some projections of how much my portfolio could be expected to grow annually. What I got was a bound report with lots of charts and graphs and some advice about estate planning, insurance, etc. The "30 year" plan showed that, based on the assumptions, I'd have plenty of money when I was ready to retire. This made me feel great, but I still didn't know how I was going to get my money out--what was the process!!

I started to read about financial planners and how they could help me manage my investments, plan for retirement, provide estate planning. I was especially interested to learn about "fee-only" financial planners. They work on a fee basis--either an hourly rate or a percentage of assets under management. They do not receive commissions for anything you buy or sell, so, ostensibly, there are no conflicts of interest. It is their fiduciary responsibility to have your best interests at heart. The NAPFA (National Association of Professional Financial Advisors) website is a good place to start if you are interested in finding a fee-only planner. I looked for those with a CFP (Certified Financial Planner) designation, because of the training, code of ethics, and continuing education these people are required to have. I found several within a reasonable distance of my home, but how to pick the right one for me? I devised a questionnaire (included my personal financial information, so planners could decide whether they'd want me for a client) and sent it to each of them. (Feel free to use it as you see fit.) Most of them responded. Some referred me to their websites rather than answer the questions. I eliminated them right away--if they weren't interested in responding to a personal questionnaire, how interested would they be in managing my assets......? I arranged face-to-face interviews, at no cost to me, with each of those who did respond and selected one of them (let's call him Tom). I picked Tom for several reasons: 1) He was young enough that he'd probably outlive me, but old enough to have had sufficient experience as a financial planner, 2) I was satisfied with his answers to my questionnaire, 3) I liked him personally, and 4) He was straightforward. Tom explained his strategy, focused my thinking, and set reasonable expectations for what he thought he could accomplish. The first step would be for him to do a detailed analysis of my assets, focusing on expenses, asset allocation, and risk, and make recommendations. The fee for this was $1000. When I received the plan and after he thoroughly explained it to me, I could decide whether or not to "hire" him. His fee would be $7500 annually based on my assets under management. For this fee I could expect four formal planning sessions each year, an annual update to the financial plan, and regular communication to discuss investment options and recommendations, and answer whatever questions I might have.

Armed with Tom's plan, I went back to Stan. Since we had a long standing relationship, I felt Stan deserved the opportunity to compete (and I wanted a "second opinion"). Although I did not let him see Tom's plan, I did tell Stan that I was not happy with the fees and expenses I was paying, and was looking for an alternative asset allocation and services that would reduce these costs. Stan arranged a meeting with one of ML's financial planners, who proposed several alternative investment mixes. Unfortunately, they were the same kinds of investments I already had and they weren't willing to reduce their fees. Thus ended my relationship with my full service broker.

So during the summer of 2001, I signed up with Tom. Over the next 3 years, Tom revamped my entire portfolio, changed my asset mix, revamped and expanded my asset allocation, reduced the risk of the portfolio. He advised me to establish a budget and begin tracking my expenses in detail (using "Quicken") so I would know where my money was going. (We've since converted to QuickBooks because Rory is a QuickBooks guru, but Quicken is more than sufficient.) We had regular conversations and every quarter we sat down and reviewed where we were and where we were going. His management fee was more than made up for by the substantially reduced expenses I was paying for my investments. Initially he set me up with Charles Schwab for my brokerage account. This provided free checking via a money market account and reduced commissions for securities transactions. My IRA account from ML was moved to TD Waterhouse, with whom Tom placed all his clients' accounts. During this time, I learned a lot about investments and how they were being managed. Some of this I learned from Tom, some by reading on my own.

When we decided that we wanted to travel extensively in retirement, I began thinking about being able to keep track of all my holdings via computer and the internet, so no matter where we might be in the world, we'd have access to everything. In addition, I wanted worldwide ATM access, electronic bill paying capability, no fee AMEX and/or VISA, and a variety of other services all at no cost and with a single financial institution. I did an extensive analysis of all possible providers and decided on Fidelity. (An added bonus was that since Fidelity managed my company's 401K plan, I could see that account along with all our others on one screen.) At the time they were the only one who could meet all of my requirements. Today several other firms can do the same. This required Tom to reestablish all my accounts (IRA, brokerage, cash management) with Fidelity and forced him to handle my accounts a little differently than his other clients who were still using Schwab/Waterhouse. It was at this point I began to realize that Tom wasn't as on top of things as I'd have liked. I had to prod him to schedule our quarterly meetings which were turning out to be long on charts and graphs and short on advice. Then I read an article by Paul B. Farrell about something called the Coffee House Investor. I had never considered index funds before because "who wants to get market returns; everyone wants to beat the market". But what I read made sense. (See my article "Investments & Golf Clubs: It's All Marketing"). The conclusion I drew was that I could manage my own assets and save Tom's annual $7500 fee. But I wasn't brave enough to experience the financial advisor equivalent of "cold turkey". So what I did was pick a date (March 1, 2005) and create a dummy portfolio made up of the 7 Vanguard Index funds that comprise the Coffee House Investor portfolio. I used the Stock Portfolio function that I'd set up on my Yahoo home page to track the funds in my real accounts to create the dummy portfolio and "funded" it with exactly the same total amount of $$$ that I had in the real accounts. I divided this "money" in the recommended percentages to the 7 index funds. Then I sat back and watched what happened. By the end of the year (after only 10 months), my hypothetical portfolio outperformed my real portfolio by over $80,000!! and this didn't include reinvesting dividends which would have been too hard to track. It also eliminated the issue of taxes, since I wasn't taking distributions into account and I wasn't selling anything. Let me tell you that I had quality funds in my real portfolio from excellent fund families like Dodge & Cox, Vanguard managed funds, T R Price, and a few others. Their expense ratios were relatively low, but not nearly as low as the index funds; and one thing I'd learned was that minimizing investment costs (Commissions, expenses, fees, and taxes) is the most important factor in determining investment return. But I wasn't quite ready to cut Tom loose. In what would turn out to be our last quarterly meeting, I asked him if he would be interested in keeping me as a client on an hourly fee basis, so I could use him for periodic advice and an annual review of my plan. He declined and I'm glad he did (for reasons explained in "Investments & Golf Clubs: It's All Marketing"), and I went my own way. I do suggest that if you choose to engage the services of a financial planner, choose one who will work on an hourly basis, rather than on a percentage of assets under management. Your objective should be to keep fees to a minimum so you will have as much of your money as possible to invest. (For more information, I refer you to "The Coffee House Investor" by Bill Schultheis, "The Lazy Person's Guide to Investing" by Paul B. Farrell and a link to sample lazy portfolios).

The last step was to map my current holdings into my new portfolio of index funds. I modified the Coffee House model holdings (60% equity index funds; 40% bond index funds) slightly by splitting the 40% allocation in bond funds equally between Vanguard Total Bond Index and Vanguard Inflation Protected Securities Index (instead of putting it all in Total Bond). We completed our first year at the end of 2006 and have been quite happy with the results; not to mention our satisfaction with finally being the masters of own destiny. By the way, the $7500 we save on financial advisory fees easily covered the cost of the Long Term Care Insurance policies we bought as well as the incremental cost of medical insurance (as a retiree from IBM compared to what I was paying as a full time employee of Gartner, Inc.) and subsequently, medicare.

Oh yeah, I almost forgot: my original question about how to get my money out. I've read about several methods, but the only one that makes sense to me is to take it out of each asset class in the same proportion as your overall investments. For example, if your budget (you do have one, right?) indicates that you'll need to withdraw $50,000 to cover your expenses for the year, and your overall asset allocation is 40% in bonds, 30% in domestic equities, 20% in foreign equities, and 10% in real estate trusts; you'll get $20K from your bond funds, $15K from your domestic equity funds, $10K from foreign equity funds, and $5K from your REITs. This is a bit (but not too) simplified. For more detail I refer you to "How to Retire Early and Live Well" by Gillette Edmunds.

It took more than 25 years for me to demystify investing and realize that I didn't need any help. In fact, what I thought was "help" was really hurting me in the long run. I submit that you can do the same!