A friend recently decided she must do something investment wiseOAS she has had her money in CDs for years so she went to an advisor/planner. Her husband, my former best friend, died 6 years ago and she is alone.
She is 57, would like to retire in 10 years and has no debt. Judging from what my buddy told me before he died, his insurance policy would leave her well off.
The planner is trying to pressure her into making a decision within a couple of weeks telling her she would have been a lot better off if she would have invested back in 2009.
First he suggested annuities but after doing some research she decided she doesn 't want to go that route.
She told me today one of the funds he suggests is American Funds American High Income Trust Fund (B grade I think). I don't know much about it but it has a decent 10 year average of 7 per cent. She would have to pay a front end load of 3.75 per cent which makes me think it's not good for her.
He told her a ratio of 25 percent bonds and 75 percent equities would be best. I think she would be better talking to Vanguard or Price for advice.
I am a friend and only want to give her a little advice and not get too involved.
Any suggestions would be appreciated.
Thanks in advance.
Comments
Yes, of course "she would have been a lot better off if she would have invested back in 2009." Too bad she didn't have a crystal ball.
She should reply to the financial planner/advisor: "Your clients would have been better off if you got them out of the market in October 2007 and kept them out until March 9, 2009."
Looks like the recommended investment is a junk bond fund. She needs to be fully educated on the huge differences between putting money in an FDIC Insured Certificate of Deposit and investing in a junk bond fund........night and day.
And paying a 3.75% load for any bond fund is questionable; and the load could be even more. The fund by that name that I looked up on Morningstar had a 5% load.
I agree with you, that she would be well served talking to Vanguard. They now have various levels of advice that they give, all the way up to and including the services of certified financial professionals. And I'm sure the financial professional that Vanguard would recommend to her would not be having her purchase load funds.
You also mentioned Price; and I'm sure that the Schwab and Fidelity advisors would be worth talking to. You can always screen people in advance before deciding to go with any service or any advisor.
Front load fee in this day and age - second warning sign.
Pressure to commit - third warning sign.
Warning! Will Robinson Warning!
Then have her review their suggestions with you.
I think she will be well served.
Read the general comments on dealing with a financial planner in my recent reply in a parallel thread which is similar advice I would provide here.
mutualfundobserver.com/discuss/discussion/comment/38278/#Comment_38278
Now that I have that off my chest, I would tend to agree with those that suggest she talk to Vanguard or a fee- only financial planner. Actually, its my belief that there should be no other kind but that's a different fight.
Good luck in getting her to accept your advice.
Best,
However, I'm not ready to condemn the rest. Had the annuity suggestion come with a discussion of how income might be coordinated with Social Security, how much was needed at what time, this could have been a reasonable discussion and proposal.
"In this day and age", people are getting pushed into wrap accounts, typically costing 1%/year. Compared to this, a portfolio of American Funds A shares could look like a positive bargain. The front end load, once paid, is done with. If you switch from one American Fund mutual fund to another, there is no additional charge.
Further, the family seems to give breakpoints based on total AUM (excluding MMF), not just investment in the fund being purchased. It shouldn't take many years before an American Funds portfolio (A shares) comes out less expensive than one managed as a newfangled wrap account.
The shares the planner was recommending were A shares. These have a 3.75% (or less) front end load. B shares are no longer offered by American Funds.
The fact that 3.75% was mentioned as the load for these shares says that we're talking about less than a $100K total investment (across all American Fund mutual funds). Because that's where the load drops to 2.5%.
I'm curious about the 75/25 recommendation. That's more aggressive than "conventional wisdom" suggests. Not that I necessarily disagree with it, but rather that it could suggest that the friend needed hefty returns for retirement. But that seems to contradict the comment that she was in good shape due to the life insurance policy. Perhaps this indicates the planner wasn't paying attention (which would be enough to rule him out), or perhaps there are other issues we don't know about.
In any case, it sounds like there's a fair amount of miscommunication going on.
She is 57, would like to retire in 10 years and has no debt. Judging from what my buddy told me before he died, his insurance policy would leave her well off.
The planner is trying to pressure her into making a decision within a couple of weeks telling her she would have been a lot better off if she would have invested back in 2009.
First he suggested annuities but after doing some research she decided she doesn 't want to go that route.
She told me today one of the funds he suggests is American Funds American High Income Trust Fund (B grade I think). I don't know much about it but it has a decent 10 year average of 7 per cent. She would have to pay a front end load of 3.75 per cent which makes me think it's not good for her.
He told her a ratio of 25 percent bonds and 75 percent equities would be best. I think she would be better talking to Vanguard or Price for advice.
I am a friend and only want to give her a little advice and not get too involved.
Any suggestions would be appreciated.
Thanks in advance.
---
Apologies Daves ... I should also add that I agree with the general demeanor of the advice above. I wouldn't be going from 0% equities into 75% at this time if I were her and have serious reservations about that planner in general.
In several recent monthly commentaries Professor Snowball has alluded to the "toppy" equity markets (my terminology - not his). So, a good read for your friend would be some of these recent commentaries - at least the portions relating to current valuations (which I believe are generally in the earlier portions.)
Here's one: http://www.mutualfundobserver.com/2013/12/december-1-2013/
Regards
Sorry for the duplicate posts - don't know what I did!!
Thanks for your input - you raise some good points. I can't answer some of your questions such as how much she has to invest.
I got the impression from members of this site not to pay a load for any fund but it would make sense if she is assured of good returns.
As for the bond advice she told me several times he advised her to invest in B rated bonds. I will ask her more about it the next time we speak.
I read in the business section of the newspaper this morning that individual investors trading $100,000 in bonds of municipalities in December paid brokers an average spread of 1.73% compared to .87% for corporate bonds. This because there are less restrictions on these type of bonds
Can B rated bonds consist of municipal bonds and if so could this be one of the reasons he is recommending such a them to her?
Can you give me an idea of what a good ratio of bonds to equities would be for someone in her situation - saying she lives to be in her 90s? I realize you need a lot more info but a ballpark number would be great.
I do think talking to Vanguard, Price or another planner would be beneficial.
Again, thank you and others for the info!
Yes - of course. There are several bond rating agencies. Three prominent players are S&P, Moody's and Fitch and their ratings vary a bit. But, according to S&P's definition, "B" would designate a junk bond. As a matter of fact, the next higher rating "BB" is also considered junk. "BBB" represents S&P's lowest tier of "investment grade" paper. http://www.standardandpoors.com/ratings/definitions-and-faqs/en/us
Sorry, but can't address your other two questions which pertain to whether investing in junk bonds would be appropriate for this individual or what percentage of equities she should hold. I'm neither qualified to offer such advice, nor would I have all the information in hand to make a knowledgable recommendation.
One avenue you might consider (and only one of many possible courses) would be to consider utilizing some of the "Target Date" offerings from a number of prominent fund houses. And even if she doesn't invest in these, their annual reports make for interesting reading and provide a nice "glimpse" into what their managers consider a prudent level of commitment to various asset classes.
Hope this helps a little.