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Finding the Right Advisor or Trustee

It's all about low costs, a sensible strategy, and sound ethics.

Samuel Lee, 08/26/2014

This article was published in the August 2014 issue of Morningstar ETFInvestor.Download a complimentary copy of ETFInvestor here.

One of the big tasks faced by older investors is setting up a portfolio for the benefit of another person, who may not be knowledgeable about investing. Usually these investors are knowledgeable about investing, have had successful careers, and have managed their own portfolios for most of their lives, but are looking to simplify their affairs for their spouses and children. However, success in business and in investing has created an unusual blind spot: whom to entrust assets to and how a safe, robust portfolio should look that can withstand the vicissitudes of the markets over decades without much intervention.

When someone who doesn't know much about money is thrust into the task of managing a lot of it, the outcome is disaster. Finding someone you can trust who also offers good value for his services can be hard. In my experience, good advisors are humble about the value they can provide and are aware that charging more than 1% on a retiree's portfolio is a huge drag on his income stream and is likely to dramatically shorten the expected longevity of the portfolio.

A good default option against which all prospective advisors should be compared is a not-for-profit firm like Vanguard or TIAA-CREF. An advisor from one of these firms will not offer outstanding insights, make prescient moves, or select star managers. In fact, much of their advice will be cookie-cutter. And that's okay, even desirable. When dealing with financial "helpers," the overriding goal should be to find someone who won't steal from you, charge you too much, or stoke your emotions, while offering competent financial planning. Asking for much more is like going to your local park in the hopes of recruiting NBA-level talent to your intramural team.

When assessing advisors, look for the following:

1) Low all-in costs. The standard by which all potential advisors should be judged in this respect is Vanguard.

Vanguard Personal Advisor Services charges only a flat 0.30% of assets under management and requires a modest $100,000 minimum for a dedicated advisor with a Certified Financial Planner designation. Don't expect fancy tax- or estate-planning, but competent, boilerplate advice from a trustworthy source. Vanguard also has a slightly more expensive service for those who have more demanding needs.

Vanguard also offers dirt-cheap trust services. Investment-management services cost 0.70% for the first million, 0.35% for the next million, and 0.20% for everything after that. They charge a flat $2,500 annual fee per trust registration per trustee. Not only is this an outstanding deal, you greatly reduce the chances your trust falls into the hands of corrupt or incompetent trustees. This peace of mind is hard to beat.

Samuel Lee is an ETF Analyst with Morningstar.

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