809 miles and a widow

This is the story of a household 809 miles from my office.

The man died at 45, leaving his wife and three daughters.  He had all his investable assets with me outside his 401k.  He had 1.2MM in life insurance.

His wife decided she wanted the money "closer" and has it with a broker in her hometown.

We will follow this journey for the next few years.

The investments are currently in mutual funds with an expense ratio of 1.05% and she is being charged a management fee of 1.1%.

For the $2.1MM dollars, it will cost her at least 2.15% (~$45,150, about $20,000 more than my costs).  Let's see what other mistakes are likely to be made:

(1) Will all the fees be taken out of the taxable account so that they can be deductible (Schedule A, Line 23)?
(2) The taxable account has a yield of 2.3% and no muni bonds.  The tax deferred account has a yield of 0.8%.

Given that the widow will not have any income - outside of social security benefits - the dividends, capital gain distributions, and interest will be taxable.  Also, her social security survivor benefits will be taxable for more than $15K.

Additionally, with the spousal beneficiary IRA, she has the opportunity to maximize tax deductions now and not leave them on the table.  This will not be apparent to her now, but when she is 70, this could reduce her taxes over a lifetime close to $425,000.

Taxes and expense are likely to cost her over $1MM more than necessary over a lifetime.  We haven't even talked about risk yet.  How much more risk will she has to take to "offset" the taxes and expense and what will that cost her in terms of quality of life.

Stay tuned.  This should be an interesting and expensive lesson.

Seasonal Returns

Source: CXO Advisory - Case for Sell in May

or is it monthly noise - source: Yardeni Research

Active vs. Passive - Bi-Annual Benchmark

Like this a lot.

One disclaimer.

Realize this is not risk adjusted.  I am a big believer in indexes and cost management.  That said, I don't want to throw out risk when I make my evaluation.

For equities, I supplement with low volatility indexes and other risk-adjusted indexes.

For fixed income, there are 9 sectors.  Passive indexes fail to give the best diversification in this space.

http://us.spindices.com/documents/spiva/spiva-us-mid-year-2013.pdf

Mutual Fund games that Broker-Dealers Play and Simplify, Simplify, Simplify

Mutual Fund Games - From ritholtz.com

Simplify and Straighten Up your finances (NYT)

Active Funds make sense...sometimes (Rick Ferri)

Ending the "Fee Only" Confusion

Source: WSJ

FINRA - 44 pages of conflicts of interest that your Broker has

Source: WSJ

I am an RIA for a reason.  I don't sell insurance for a reason - to avoid these conflicts of interest.

My Relevant Reading List To Help My Clients

6 Ways Money Really Can Buy Happiness (Kitces)

Setting Priorities Rather Than Laundry Lists (Kitces)

Beyond the Fiduciary Standard (Ferri)