I sat down with one of my former teachers last night. A bar, two beers, and his Ameriprise statements.
His wife is an educator too. Their two Roth IRAs are composed of 16 total mutual funds. Why 16? Because that’s what their advisor recommended.
The majority of these funds (11 of 16) had 5.75% front loads. Every dollar they contribute takes an immediate 5.75% haircut. That’s crazy.
All of these funds had 12b-1 fees.
The average dollar-weighted expense ratio was 1.17%.
And their total portfolio was 10% cash-equivalents (?!) and 40% fixed income, despite being part of the terrific NYS Teachers’ Retirement System (aka – pension! the best kind of fixed income out there!).
I went through step by step and explained the problems I saw, and how to fix them.
- There’s NO reason to be paying loads or 12b-1 fees, because there are too many great alternatives.
- There’s NO reason to be paying a 1%+ expense ratios for simple stock/bond mutual funds, because there are too many great alternatives.
- For retirement-specific savings, there’s rarely a reason for teachers to hold fixed income investments (e.g bonds, annuities), because their pensions and Social Security are already covering any fixed income needs.
Teachers (or any readers, in fact): if your current “advisor” isn’t willing to listen to these facts and fix your portfolio, dump them like a bad prom date. Vanguard, Fidelity, and Schwab have amazing investing options with expense ratios less than 0.1%, and no extra fees.
This is the 4th educator I’ve sat down with this year for a similar “portfolio rescue,” and 4-for-4 have been egregious examples of bad advising. Both my parents were teachers. This stuff offends me.
Below is a terrific video specifically geared toward teachers…
Educators are getting taken advantage of. They have amazing benefits, like summers off and pensions. But their investing world is the opposite of amazing. It’s infamously predatory. Their 403b programs introduce them to suboptimal
salesmen advisors who too often guide teachers into poor investments.
Why? Because high fees mean high commissions. What’s bad for the teacher is good for the advisor. That’s how the advisors are getting paid.
Show me the incentives, I’ll show you the outcome.Charlie Munger
Do me a favor and send this article to an educator in your life. It’s in their best interest.