When Enough is Enough

After my stepfather passed away, my mom started working with a local bank to manage her investments.  At the time, I was living in California and it was difficult for me to help her with investment decisions.  Plus, I had always warned my clients that allowing family members to get involved in your investments was a bad idea because you could always fire a stranger but you can never fire a member of the family.  It was with this in mind that I allowed her to continue this relationship despite my occupation as a financial planner.Since then, I’ve moved to North Carolina and now I live in the same town as my mom but until recently, I have left her well enough alone when it came to her investments.  The truth is I didn’t want to be blamed for making poor investment decisions so I figured as long as someone else made them, my relationship with my mom would be preserved.  Well, like any good mom, she still values my opinion and every time the bank wants to make an investment recommendation, she invariably wants to know what I think.  I guess I should be flattered, but I thought the whole purpose of letting the bank do it was so that I wouldn’t have to.

Well, whatever the reason, the last email I got from my mom asking for an opinion about the investment recommendations was the proverbial straw that broke the camel’s back.  It’s not that I’m upset that my mom is asking once again for my opinion but rather I actually have one this time and here it is: I think my mom should take her business somewhere else.  Here’s why:

I don’t like what they are doing with the stock portion of the portfolio.

When it comes to investing, my mom is on the conservative side of moderate but I still think it is a good idea for her to have some of her money invested in the stock market.  The last time I looked at my mom’s portfolio, I noticed that the bank was using retail mutual funds so I asked her to question why they would use retail funds instead of just buying shares of stock directly.  She did so they responded by recommending that she liquidate her large cap stock mutual funds and purchase over 50 individual stocks.  Well, I guess we asked for it but if she’s going to own 50 stocks, she might as well own a mutual fund.  My concern was that mutual funds can be expensive but at the same time, having so many stocks would overwhelm her so my compromise would be to have her purchase an exchange traded fund or ETF for short. Her primary goal is to have dividend income, which could be accomplished through any number of ETFs, including iShares’ Dow Jones Select Dividend Index Fund (DVY), S&P’s SPDR S&P Dividend ETF (SDY), or Vanguard’s High Dividend Yield ETF (VYM).  The point is using an ETF accomplishes the same thing as a mutual fund (i.e. diversification) but typically at a much lower expense. For a more complete list of high dividend ETFs, visit http://etf.stock-encyclopedia.com/category/high-dividend-etfs.html

I don’t like what they are doing with the bond portion of the portfolio.

Well, you can probably guess what my beef is here—they are using bond mutual funds.  Bond funds are fine for investors that seek current income but don’t necessarily have enough to buy bonds individually. However, if an investor DOES have enough money, I would prefer to have them buy individual bonds, especially in today’s economic environment.  As mentioned previously, mutual funds give instant diversification but buying a pool of existing bonds when interest rates and inflation are relatively low exposes the investor to a loss of principal if and when interest rates and/or inflation rise.  By purchasing individual bonds and holding them to maturity, my mom can maintain a conservative position while reducing her chances of losing money.  It also gives her more control over her cash flow since we can purchase securities with various interest payment dates and maturities.

I don’t like what they are doing with the cash portion of the portfolio.

You might be wondering what I have against cash?  Well, nothing really.  It’s just that the only reason my mom even has money in cash is to pay the annual expenses charged to the account.  The way I see it, she really doesn’t need to hold anything in cash unless she is planning to spend some of it, in which case I would transfer it to a checking account.  Even so, for money she plans to spend within the next 5 years, I would still prefer individual securities to simply holding the money in a cash position.

I’m sure what the bank is doing for her is fine for the average investor but the average investor probably does not have a financial planner for a son.  That said, I’m not suggesting that she use a DIFFERENT investment strategy but rather that she takes a different approach to how it’s IMPLEMENTED.  She’ll probably just leave it where it is but if I had my druthers I’d move it to a self-directed brokerage account.  If you need help finding one, check out Erik Carter’s recent post on the subject.

 

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