Is It Time To Fire Your Advisor?

In late May I wrote an article titled “What I Hate About Mutual Funds”, the article focused on the consistent underperformance of mutual funds and their high fees. This will be a continuation of that article depicting a real-life example of one of my clients.

For privacy purposes I’m not going to use my real client’s name, let’s call him Jack. Jack is an old high-school friend of mine, we manage to see each other once or twice a year despite living halfway across the country. Jack has moved up the professional ladder and has accumulated a sizable investment account for being in his late 20’s. Jack has a basic understanding of the market and began to grow leary of his portfolio. I offered to take a look to see if his suspicions were warranted.

Jack’s accounts were with an advisor at another investment management firm. The first thing I did was look up their ADV to determine what his advisor was charging him for an annual management fee. Form ADV is the uniform form used by investment advisors to register with the Securities and Exchange Commission (SEC) and state securities authorities. The brochure is the primary disclosure document that investment advisors provide to their clients. Here is an excerpt from the ADV of Jack’s prior investment firm:

For the Programs described in this brochure, each Client pays an asset-based wrap fee of up to 2.5%

Jack was unhappy with the performance of his portfolio. Jack’s accounts were invested entirely in active mutual funds, he had 12 different funds ranging from international small-cap to domestic large-cap. Here’s a breakdown of his portfolio when it was transferred to me:

In my opinion, Jack is significantly over-weight international as well as small/mid-cap stocks. Jack opened his account in April of 2017. The following are the returns of 3 low-cost benchmark ETFs.

SPY – tracks the performance of the S&P 500. VXF – tracks the performance of small and mid-cap US companies. VXUS – tracks the performance of companies located in developed and emerging markets, excluding the United States.

In addition, Jack’s mutual funds have annual expense ratios (fees) ranging from 0.70 – 1.25%. In contrast, the 3 ETFs listed above have annual expense ratios under 0.10%.

If you’re looking to start investing or would like me to review your current portfolio, please send me a direct message, email me at Blake@SuccessfulPortfolios.com, or call/text at (402) 515-3382.


This article can also be found on LinkedIn