Vanguard Personal Advisor Services Review – Low Cost Managed Portfolio and Guidance

vglogoMany people hire a financial advisor because they aren’t comfortable investing on their own, and they appreciate having an experienced person to talk to whenever they have any questions. However, this usually means paying at least 1% of your portfolio assets every year to that person. Especially given the current low interest rate environment, 1% is a huge number and could eat up a large percentage of future returns.

Vanguard has recently rolled out a new product called Vanguard Personal Advisor Services (PAS) where someone will work with you to create a financial plan, implement your portfolio for you, and be available to update and discuss that plan as needed. The minimum asset size is $100,000 and the cost is 0.3% of assets annually, which is much lower than the industry standard. As a DIY investor, I was interested in this service for my spouse in case I am somehow incapacitated one day. Here are my findings based on calling in as a customer to three different Vanguard reps and various online sources*. Anything quoted below is taken directly from this detailed Vanguard brochure [pdf].

Qualifications. You must have a minimum of $100,000 of investable cash or securities. Eligible accounts include individual accounts (including IRAs), joint accounts, and certain trust accounts. Note that 401(k) plan assets are not included.

Fees and costs. Vanguard PAS will charge you 30 basis points (0.30%) annually. Fees will be calculated quarterly and based on your average daily balance the prior calendar quarter. The fee will be calculated across all securities in the portfolio, with the exception of money market fund positions. This does not include the underlying expense ratios of any mutual funds or ETFs that you may own in the portfolio.

Annual Financial Plan and Personal Review. First, Vanguard will gather information from you via an online questionnaire (and telephone discussion if needed) in order to “understand your financial objectives, such as your age, specific financial goals, investment time horizon, current investments, tax status, other assets and sources of income, investment preferences, planned spending from the Portfolio, and your willingness to assume risk with the cash and securities being invested in the Portfolio.” They will focus on your specific goals, which can include planning for college, saving for a home, establishing a rainy-day fund, or saving for retirement. They will take into account things like Social Security, pensions, IRAs, 401(k) plans, and other investment accounts held outside of Vanguard.

Vanguard PAS will then create a draft financial plan for you based on this information, which you will discuss with a Certified Financial Planner (CFP) to finalize and approve. At least annually, your advisor will schedule another phone conference with you to see if there have been any changes in your “financial situation, other assets or sources of income, investment time horizon, investment objectives, planned spending from the Portfolio, or desired reasonable restrictions” that may require a new Financial Plan to be approved.

(Side note: There is a separate Vanguard Financial Plan product that is similar to the plan part of this service, but you must implement the recommended portfolio yourself and it is a one-time consultation. The recommended portfolio for both products should very similar if not identical. The cost is $1,000 for those with under $50k in combined assets at Vanguard, $250 for $50k-$500k in assets, and free for over $500k in assets. The Finance Buff got one and did a review.)

Portfolio construction and Investment methodology. Their investment methodology incorporates Vanguard’s company values of advocating low costs, diversification, and indexing. As a result, recommended portfolios will mostly include Vanguard’s broad index funds and/or ETFs. They can and will take into account your existing positions or special requests, as long as they meet certain standards. Taken from their brochure:

The recommendations made by VAI in connection with the Service will normally be limited to allocations in Vanguard Funds and will generally not include recommendations to invest in individual securities or bonds, CDs, options, derivatives, annuities, third-party mutual funds, closed-end funds, unit investment trusts, partnerships, or other non-Vanguard securities, although you may be able to impose reasonable restrictions upon our investment strategy.

They will work to maximize after-tax return. They will not attempt to “predict which investments will provide superior performance at any given time”. No market timing here.

Quarterly portfolio review and rebalancing. Each quarter (with timing determined by your contract anniversary date), they will review your portfolio. If your portfolio asset allocation deviates from the target asset allocation by more than 5% in any asset class, they will rebalance your portfolio by buying and selling the appropriate funds. There is a prescribed fund hierarchy in order to do this will minimal tax impact.

Ongoing contact and advice. At any time, you can contact a Vanguard PAS advisor to talk about your financial plan. There are no set limits on how many times you can contact them. I was told that if you have $100,000 to $500,000 in assets, you will be directed to a team pool of CFP advisors. If you have 500k or higher, you will be assigned a specific person to be “your advisor”. Of course that person may change from time to time if they switch jobs, etc.

No DIY Trading! You are not allowed to make any trades yourself in any portfolio managed by VPAS. You must call your Vanguard advisor and discuss and proposed changes for them to execute. Online trading will be disabled in your account. This may be weird for long-time DIY investors.

In your Service Agreement, you’ll agree not to purchase or sell securities in your Portfolio while enrolled in the Service, and you’ll be blocked from such activity until you terminate the Service. You’ll also be prohibited from establishing or maintaining other services on any accounts in the Portfolio, including but not limited to checkwriting and automatic trading services (such as automatic investment/withdrawal/exchange) and setting required minimum distribution (RMD) payments. Other account transactions or services may be restricted or unavailable through the web experience, but can be processed or enabled with the assistance of your advisor.

Recap and Commentary

This is a managed portfolio product. That means that they will determine a low-cost portfolio of Vanguard funds (mostly index) based on your specific needs, implement it for you, and provide ongoing advice and adjustments as needed. Everything will be done through a Vanguard representative, not with the click of your mouse. Such guidance will ideally help you handle your emotions when it comes to investing, as there will be someone to help you keep following your plan during both up and down markets. There will be someone to talk with whenever you have any life changes or additional questions.

0.30% of $100,000 is only $300 a year, making this quite a bargain at that level. At much higher asset sizes, I would prefer switch to a flat fee as paying $5,000 or more every year starts to feel a bit steep. I would say that if you have under $100,000, don’t fret and just buy a Vanguard Target Retirement Fund as that is essentially a simple managed portfolio.

After doing my research, my new suggestion to my wife is to pay for Vanguard Personal Advisor services if I am unable to manage our investments. She is brilliant but lacks the interest (and time if I’m gone with our kids and all) to do it on her own and I trust Vanguard to do a fine job. The reasonable fees, ability to keep my assets at Vanguard, and assigned human advisor make it better in my opinion than any other “robo-advisor” option. Still, I hope she never has to sign up. 😉

* More coverage: Bogleheads blog, NY Times, Michael Kitces, InvestmentNews

Daycare Costs vs. In-State College Tuition

There are many articles about rising college tuitions and how to best save for college. But according a recent study, in 31 states the annual cost of day care for an infant exceeds the average cost of in-state tuition and fees at public colleges. From this WaPo article:

We accept that it typically takes 18 years to sock away a sizeable-enough college nest egg. Considering that child care is an equivalent, if not greater, expense and that the average maternal age at first child birth is 26, this suggests that we should similarly start putting money away for day-care expenses when we’re roughly 8 years old.

Here’s the state-by-state breakdown:

daycarecollege

Do We Regret Paying Off Our Mortgage? One Year Update

It has been a year since we paid off our mortgage early. I already discussed our reasons for doing so in that post, so I won’t repeat them here. I also wrote a really long post on every single facet I could think of in the Pay Off Mortgage Early vs. Save More For Retirement debate. So I won’t go into that here either.

But how do we feel a year later? Did we regret it? Let’s take a look at what happened from March 2013 to March 2014.

Mortgage rates bounced around a bit but in general look to be about half a percentage point across the board. (Source: HSH.com) I probably couldn’t get the same mortgage rate I had before anymore, but it would still be a pretty low rate historically.

hsh_march2013

Investment returns over the last year were quite robust. If I model my portfolio roughly with the Vanguard LifeStrategy Growth Fund (VASGX) which is a low-cost index fund split roughly into 80% broadly diversified stocks and 20% broadly diversified bonds, my trailing 1-year return would be 15%.

vgasx_march2013

Bond interest rates in particular went up overall. The 10-year Treasury Bond rate went from 1.8% to nearly 2.8% over the last 12 months. (Source: FRED)

fred_march2013

(Note I don’t talk about the value of my home. This is because paying extra towards your mortgage early is not an additional investment in your house. You already own the house so you are already exposed to any change in home value regardless of your mortgage size. The mortgage is just another debt with an interest rate.)

So interest rates went up and we could have earned more money investing the money in my portfolio rather than pay down my 3% mortgage. Well, if I had a time machine maybe that would matter. But in reality it has been great. The lack of a mortgage reduced our monthly expenses significantly. We have been able to work less and got to spend an entire year watching our colicky baby grow into walking, talking, little person (meaning we are still more tired than ever before, ha) while still maintaining good cashflow and thus minimal financial stress. I’m not saying this applies to anyone else, but paying off our mortgage early has worked out well for us.

How Children Succeed: Grit, Curiosity, and the Hidden Power of Character

toughbookWhat makes children, or even adults, succeed? It’s commonly believed that cognitive skills, also known as intelligence, are a primary factor. Smart people are the successful ones, right? Tests like the SAT measure this stuff, skills like pattern recognition, reading comprehension, and math problems.

But in the book How Children Succeed: Grit, Curiosity, and the Hidden Power of Character by Paul Tough, the author discovers a lot of evidence that doesn’t support that theory. Instead, non-cognitive “character” skills like perseverance, curiosity, optimism, and self-control may be even more important.

Tough weaves together various research studies and experiments to make this argument. Here are just a couple of examples:

  • GED vs. High-school graduates. Passing the GED test means you are proficient in the same academic areas as an actual high-school graduate. Yet people with GEDs are consistently less likely to graduate college, have lower incomes, and are more likely to be in jail. Why? Perhaps beings a high-school graduate requires additional traits – the inclination to persist at a often-boring task, the willingness to delay gratification for a long-term goal, or the ability to adapt to different social environments.
  • KIPP charter schools. KIPP schools are charter middle and high schools that take in lower-income students by lottery (no test screening) and use intensive educational efforts with the ultimate goal of a 4-year college degree. The first few KIPP classes improved their standardized test scores in middle and high school significantly. Yet the actual college graduation rates were disappointing, with a curious pattern:

    The students who persisted in college were not necessarily the ones who had excelled academically at KIPP. Instead, they seemed to be the ones who possessed certain other gifts, skills like optimism and resilience and social agility. They were the students who were able to recover from bad grades and resolve to do better next time; who could bounce back from unhappy breakups or fights with their parents; who could persuade professors to give them extra help after class; who could resist the urge to go out to the movies and instead stay home and study.

Further good news is that character skills appear to relatively malleable; you can learn to improve your level of grit and self-control. KIPP schools now provide their students with a “character report card” as well as traditional academic grades.

This book is a great read for parents and educators, but I would say that the conclusions extend to adults and even personal finance. We all need these skills to be good citizens. Being financially secure is simple on paper – spend less than you earn, invest the difference for the future, and keep it up every year. Hmmm… that sounds a lot like self-control, delayed gratification (and perhaps optimism :) ), and persistence.

I would argue that these character skills are more important than what you could learn in any book about Roth IRAs or modern portfolio theory. The question is how do we teach adults these traits, or is it too late?

Buffett’s Simple Investment Advice to Wife After His Death

The 2013 Berkshire Hathaway (BRK) Annual Letter to Shareholders by Warren Buffett is now available to the public. Download here [pdf].

I’ve been haltingly working on making preparations for my family in case of my premature demise. I’ve done a number of things, but I’m still not sure if my wife can manage our investments when I’m gone. Should I try to teach her, even if she has little interest? Should I find an advisor? Should I hire him/her now, even though I am a control freak? Interestingly, Buffett addresses this issue partially in his letter.

First, Buffett repeats his advice that while he doesn’t believe in efficient markets, he does believe that non-professionals should invest their money in low-cost index funds.

My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.

Of course, I’m sure the sum set aside would be enough even if kept 100% in cash. But index funds were still a surprise to me given how many smart money managers Buffett knows. At the minimum, I figured he’d leave a big ole’ pile of BRK shares (managed by some of those smart people that he already hired). But I forgot that Buffett has already committed his BRK shares to charity.

Buffett’s simple advice made me think about my plans again. I would also leave my wife a relatively simple index fund portfolio and a paid-off house. My casual advice given to her so far is that she can spend 2-3% of the total balance each year without worrying about the money running out. With the life insurance proceeds, that 2%-withdrawal value is a bit more than what we spend now, so it shouldn’t be too hard.

If she needs help, she can contact the Certified Financial Planner that Vanguard offers clients ($50k in assets gets you access to a discounted plan from a CFP). I figure that even the cookie-cutter portfolios that they may recommend won’t be too bad in the big picture. I know this is not a complete plan, but well, I also don’t want my wife going to a high-fee manager.

Economic Mobility Studies: Will You Be Better Off Than Your Parents?

The idea that you wanted to do better than your parents was a strong one in my family and community. Two major studies on economic mobility were recently released, with the following findings:

  1. Children growing up in America today have the same chance of moving up (or down) the income distribution ladder as children born in the 1970s. No more, no less. However, the overall numbers remain lower than other developed countries.
  2. Upward income mobility varies substantially based on geography. They describe the U.S. as a collection of “lands of opportunity” that have high rates of mobility across generations, whereas in other places few children escape poverty.

If you want to see how the place where you grew up fared (based on where you lived at age 16), check out this interactive map from WaPo which tracks the upward income mobility of children of parents with income at the nation’s 25th percentile, or about $30,000 per year. Dark blue means no change from parents, light blue means they moved up to the national average, and darker yellow means they moved higher than average.

More: Paper 1, Paper 2, WaPo, Atlantic

2013 New Year’s Resolution Follow-Up

It’s time to check up on our 2013 New Year’s Resolutions, which I gave the eloquent theme “Get our crap together” (in case one or both of us dies). I will roughly follow this GYST checklist.

Will and trusts. We are fortunate to have a family friend who is an estate lawyer, and she was able to assist us with creating all of these legal documents. They included:

  • Designating a Durable Power of Attorney for financial and medical decisions, including backups.
  • Designating who would take care of our children, including backups
  • Distribution of assets and personal items. Mostly the money will go into a trust for the kid(s).

Living Will. In case one or both of us are incapacitated, this included:

  • Medical power of Attorney and backup in case of being physical incapacitated
  • Advanced directives
  • Discussions of our wishes with family.

If you can find a good estate lawyer, I would recommend that route as they should have the experience to explain all of the potential issues in your state including being prepared for future law changes. I may try to write about the general issues later once I learn more. I also meant to compare my documents with those produced by services like Legalzoom, but haven’t gotten around to that. As for costs, it will vary depending on how complicated your situation is and how many additional documents you need prepared and reviewed (power of attorney, trust, etc.).

Life insurance. We each have a $1,000,000 term life insurance policy. We think this number is more than adequate given our future expected needs and our existing savings. If one of us dies, the other will ideally not have to work anymore. If both of us die, there should be enough to cover all living expenses plus any educational expenses. To get an idea of cost, try Term4Sale.com.

Short-term disability. We both have short-term disability through our employers. I don’t feel it is necessary to buy an additional individual policy as we have sizable cash reserves.

Long-term disability. Mrs. MMB obtained an individual long-term disability insurance tailored to her profession. This was done through a recommended local insurance broker. I did not pursue buying a long-term disability plan. This is due to the fact that I felt our portfolio is large enough to provide a substantial cushion, and also due to the fact that the physical demands of my job aren’t very high and thus I worried it would be hard to qualify for benefits. Upon further thought, however, I do think I should at least price it out. Another thing to do in 2014.

Financial Education

  • Passwords. All major passwords are stored in an encrypted password manager, with most sites having a unique complex password such that one hacked database won’t affect the security of other accounts. My wife uses it all the time now and is familiar with it.
  • Cash reserves. We have one year of expenses in cash held in an FDIC-insured bank account. This will provide a cushion so that nobody will have to worry about money until life insurance proceeds arrive.
  • Spousal budget education. We did have a few discussions about our current monthly cashflow situation (income and expenses) and what spending levels could be supported with our current portfolio and with the addition of any life insurance proceeds.
  • Spousal investor education. Can my spouse manage the finances without me? Probably, but not as optimally as I’d like. I did very little in this area, and this will be the focus on our 2014 resolutions.

I think we did pretty good in terms of estate planning, but for 2014 I’ll need to be much more proactive in sharing my investing knowledge. I’d like to learn how to make some simple videos and share them on Youtube.

Part-Time Track Jobs For Mainstream Professionals?

bwfatherBusinessweek’s cover story this week is about how fathers do the work/family balancing act. The article talks about how men want to be more involved in family life as well as women but face their own unique obstacles yada yada, but this part caught my eye:

When Trombley [research engineer at Ford Motors] was expecting his first child, he and his wife, who also works at Ford, weren’t thrilled with the child-care options available, and she wasn’t eager to become a stay-at-home mother. Trombley remembered that a colleague from several years back had worked out a novel solution with her husband, with both taking part-time schedules to allow them to split the week up and each be home with their kids for half of it. Ford didn’t offer paternity leave, but it did offer a part-time track so long as an employee’s manager approved it. When baby Dylan arrived, Trombley went to his bosses and told them he wanted to drop down to 70 percent and work from home two days a week. […] There are now three other men in his department with similar part-time setups; there were none when Trombley started.

Is there a list of large, Fortune 500 employers that offer such a “part-time track” option? I only found some job board sites like 10til2 and FlexJobs. I did find this 2004 research paper Beyond the Mommy Track: The Influence of New-Concept Part-Time Work for Professional Women on Work and Family [pdf]. From the abstract:

Compared to their counterparts who worked full time, mothers who worked in these part-time positions reported significantly greater work/family balance and did not report significantly less career opportunity. The part-time group reported 47% fewer work hours and 41% lower income than the full-time group. These data support the notion that new-concept part-time work is a viable option to assist women in professional careers to successfully integrate their family career.

I’m selfishly fascinated by the idea of part-time work for salaried jobs (as opposed to hourly workers). I’ve met part-time doctors, engineers, professors, lawyers, even judges. For most of them it’s been a figure-it-out-yourself exercise, but hopefully the idea of breaking down the traditional “full-time” job into smaller pieces is gaining momentum in the corporate world. It would not only be great for mothers and fathers, but anyone who wants more control over their life.

Household Cashflow Diagram with Automated Savings & Bill Payments

As part of our transition to parenthood (less time) and part-time work (less income), Mrs. MMB and I have been trying to get more organized with our finances. I’ve eased up on my control-freak ways and we’ve shifted as many bills as we can to auto-pay status. I still try to pay everything I can with credit cards in order to make things easy to track and of course, maximize credit card rewards. Here’s a rough diagram of our current situation:

Household Cashflow Diagram with Automated Payments

We’re still trying to stick with our existing simple budgeting system and only putting money into our checking account that we are willing to spend. That way we basically force ourselves to meet a minimum savings rate for the year by “paying ourself first” with a good chunk of our paychecks into savings-type accounts (401k’s, separate bank accounts, brokerage accounts, etc). If the checking balance still grows past a certain point (hasn’t been happening much lately!), then we skim off some and transfer it over to savings.

I would note that I don’t put the credit cards themselves on auto-pay, as I still want to spend the time and look over those statements each month. I know some folks do this as well to reach nearly full-automation.

Another backup use for this chart is for reference in case something happens to me, as I usually keep track of all the bills. This fits into our 2013 resolution to get our crap together.

Charlie Munger on Teaching Character Values in Childhood

I just started reading a biography of Charles Munger, Damn Right! Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger by Janet Lowe, originally published in 2000.

Charles Munger is best known as Warren Buffett’s long-time friend, business partner, and vice-Chairman of Berkshire Hathaway. I find him fascinating on many levels – as a thinker, investor, philanthropist, and even philosopher. One of my favorite tips from him is to Work For Yourself An Hour Each Day, something I found in Warren Buffett’s biography The Snowball.

Here’s a memorable quote from the book dealing with his childhood:

Like Warren Buffett, Munger inherited no wealth. […]

“While no real money came down, my family gave me a good education and a marvelous example of how people should behave, and in the end that was more valuable than money,” explained Munger. “Being surrounded by the right values from the beginning is an immense treasure. Warren had that. It even has a financial advantage.”

Right now, there is a lot of focus on teaching “financial literacy” – which is good – but if you’re a parent of young children I feel that you have to think differently. It’s not critical to give your kid some fancy allowance iPhone app or online savings account to teach them how to manage money. What you should really be conscious of is how you act around them. Positive character traits like self-discipline, being dependable (keeping your promises), and frugality (not being wasteful) are often best taught by example. Watching you and learning such traits will help them to avoid credit card debt more than showing them how APR works. If only I could just buy them a book or something. 😉

Don’t Forget To Be Awesome

Originally posted here on December 3rd, 2005:

Thinking about goals and the future some more, I have this picture in my head of our dream future in 5-10 years:

– I work at a job I enjoy for only 20 hours a week
– My wife also works at a job she enjoys for only 20 hours a week
– We both share responsibility for taking care of our kids with minimal, if any, need for daycare.
– Our combined incomes still make it possible for us to reach our financial goals. However, we’re not really interested in being filthy rich.

We are gonna make this happen. Check back with me on 12/3/2015

Done.

We both really wanted this, even though we are more tired now than when we were both working full-time. (Even though we sleep at 9pm now instead of 1am.) Although I write about money daily (at times it may seem like an obsession)… it certainly didn’t feel like 8 years had gone by since I made this goal.

I recently bought a new print that will be in my daughter’s room eventually, but for now hangs in my home office. It says Don’t Forget To Be Awesome. I think we all have own personal definition of “awesome” – whether it’s starting your own business to being active in your community to simply being a good parent (even though that is anything but simple). Now, we are still far from reaching our “awesome”. But I think the phrasing is perfect; it’s so easy to forget to pursue our unique dreams in today’s hectic, noisy world.

We Paid Off Our Mortgage: History and Commentary

We paid off our mortgage. We contacted Provident Funding and requested the full amount due including any accrued interest, the money was sent via bank wire, and the loan is recorded as paid in full. As you might imagine, I spent many hours contemplating this move. In a somewhat anticlimactic fashion, the letter below warning us we had to pay the property taxes ourselves was the first physical acknowledgement of the occasion. I found it amusing that it was addressed “Dear Homeowner”, as I never really felt like I owned my home until now.

A bit of history. When we first bought our home, we looked at the common rules of thumb regarding house affordability and ended up paying 20% down with a initial mortgage less than 3 times our combined income. Indeed, we qualified for the mortgage on my wife’s documented income alone. We thought about getting a 15-year note but went for the flexibility of the 30-year note, while paying it down at the 15-year pace. Over subsequent refinances, our interest rate dropped from 6% to 3%. Even though this made our required monthly payment much less, we kept up the higher monthly payments which had us on the pace of a 10-year payoff.

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