Fidelity Portfolio Advisory Services?


R

RD

I was badly burned in early 2001 when using a fee based financial
advisor who purchased lots of tech stocks for me in addition to some
other stocks and a few funds. I foolishly held on to them and still
own them and they are held with Fidelity. My plan, after reading lots
of data, books, etc. on indexing supporting the thesis that it is
extremely hard to beat the market over a long time span, was to sell
off everything, harvest some losses which I can use this year and put
equal amounts into a large cap growth index fund, small cap growth
index fund, large cap value index fund, large cap growth index fund
and international index fund (probably with vanguard since fidelity
does not have all these index funds and it is expensive to buy
vanguard through fidelity). However, a rep at fidelity showed me a
portfolio drawn up for me (i dont know if this was really specifically
for me or just a generic one they use for many clients) of about 12
actively managed mutual funds that are properly asset allocated and it
is under their Portfolio Advisory Services where they manage the
portfolio for me for a 1.1% annual fee. Because they control 25
billion so there are no loads or even transaction fees - they are like
institutional players supposedly. It is seductive once again for me to
believe and hope that their analysts and team can do better than the
benchmarks or index funds. Does anyone have any experience and
impressions (good, bad, or ugly) using Fidelity Portfolio Advisory
Services? Thank you
 
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P

Paul Michael Brown

Sell everything, harvest some losses which I can use this year and put
equal amounts into a large cap growth index fund, small cap growth
index fund, large cap value index fund, large cap growth index fund
and international index fund.
Smart plan. Lots of people forget that cutting your losses is just as
important as maximizing your gains.
However, a rep at Fidelity showed me a portfolio of about 12
actively managed mutual funds that are properly asset allocated and it
is under their Portfolio Advisory Services where they manage the
portfolio for me for a 1.1 percent annual fee.
We need to clarify the fees. It sounds like they are going to charge a 1.1
percent for "managing the portfolio." If that is the ONLY fee, then it's
reasonable in a world where most actively managed mutual funds charge
about 1.5 percent. But if the fee for "managing the portfolio" is in
ADDITION to the fees charged by the mutual funds, then you would be
paying, say, 2.6 percent. Considering the hard sell you are getting, I'll
bet the two fees are added together. They wouldn't work that hard to sell
you a product where the fee is a paltry 1.1 percent.
It is seductive once again for me to believe and hope that their analysts
and team can do better than the benchmarks or index funds.
Don't forget that the actively managed funds have to beat the indexes
*after fees.* You can construct a very well diversified portfolio of index
funds at Vanguard for about 0.25 percent per year. Even if Fidelity only
charges a 1.1 percent fee, the actively managed funds would still have to
beat the indexed by 0.85 percent. If (as I suspect) Fidelity's Porfolio
Advisory Services really costs 2.6 percent then the managers need to beat
the indexes by 2.35 percent. Not gonna happen.

My advice: 80 percent of your equity position in Vanguard's Total Stock
Market Index, which tracks the Wilshire 5000, and 20 percent in their
Developed Markets Index, which tracks the EAFE index. That way you'll own
just about every stock worth owning globally for about 0.25 percent per
year.
 
R

RD

Smart plan. Lots of people forget that cutting your losses is just as
important as maximizing your gains.


We need to clarify the fees. It sounds like they are going to charge a 1.1
percent for "managing the portfolio." If that is the ONLY fee, then it's
reasonable in a world where most actively managed mutual funds charge
about 1.5 percent. But if the fee for "managing the portfolio" is in
ADDITION to the fees charged by the mutual funds, then you would be
paying, say, 2.6 percent. Considering the hard sell you are getting, I'll
bet the two fees are added together. They wouldn't work that hard to sell
you a product where the fee is a paltry 1.1 percent.


Don't forget that the actively managed funds have to beat the indexes
*after fees.* You can construct a very well diversified portfolio of index
funds at Vanguard for about 0.25 percent per year. Even if Fidelity only
charges a 1.1 percent fee, the actively managed funds would still have to
beat the indexed by 0.85 percent. If (as I suspect) Fidelity's Porfolio
Advisory Services really costs 2.6 percent then the managers need to beat
the indexes by 2.35 percent. Not gonna happen.

My advice: 80 percent of your equity position in Vanguard's Total Stock
Market Index, which tracks the Wilshire 5000, and 20 percent in their
Developed Markets Index, which tracks the EAFE index. That way you'll own
just about every stock worth owning globally for about 0.25 percent per
year.
Thank you for your reply. Although Fidelity indicated that there would
not be any loads (even for loaded funds that they select due to the
enormous size of the Portfolio Advisory Services) or tranaaction fees,
there are still the usual mutual fund expense fees...some of course
being higher than others.
I am leaning towards index funds the more I think about it - however,
why would putting 80% in a total stock market index such as the
vanguard one you mentioned and putting 20% in an EAFE index fund as
you suggest be preferable to putting 20% each into the vanguard small
cap value index fund, the small cap growth index fund, the large cap
growth index fund and large cap value index fund in addition to the
international one? does the latter stratgey represent better or wiser
asset allocation or is it an unwise approach when trying to build an
index fund porfolio (assuming I want to invest 100% in equities and
not bonds)? perhaps the 2 strategies are so close that it really
doesnt matter?


======================================= MODERATOR'S COMMENT:
Please trim the post to which you respond.
 
B

Brent D. Gardner, ChFC

Paul Michael Brown said:
My advice: 80 percent of your equity position in Vanguard's Total Stock
Market Index, which tracks the Wilshire 5000, and 20 percent in their
Developed Markets Index, which tracks the EAFE index. That way you'll own
just about every stock worth owning globally for about 0.25 percent per
year.
That's interesting. Do you recall how many public companies fail in a year?
Lynch's "DiWORSEification" suddenly pops into mind.

I wouldn't make recommendations to anyone that I didn't know, and know very
well, but that's because I do this for a living.

Brent D. Gardner, ChFC
Chartered Financial Consultant
http://members.cox.net/brentdgardner1378/
http://www.topgunproducers.com/

Si vis pacem para bellum!

"Be ever questioning. Ignorance is not bliss. It is oblivion. You don't go
to heaven if you die dumb. Become better informed. Learn from other's
mistakes. You could not live long enough to make them all yourself." - Hyman
George Rickover (1900-86), Admiral, US Navy, advocated development of
nuclear subs & ships

The Chartered Life Underwriter (CLU) and Chartered Financial Consultant
(ChFC), designations owned and exclusively offered by The American College,
signify the highest standards of academic study and professional excellence
in the financial services industry.
 
P

Paul Michael Brown

Thank you for your reply. Although Fidelity indicated that there would
not be any loads (even for loaded funds that they select due to the
enormous size of the Portfolio Advisory Services) or tranaaction fees,
there are still the usual mutual fund expense fees...some of course
being higher than others.
So, as it happens, my prediction was correct. The "portfolio advisory fee"
of 1.1 percent would be ADDED to the fees charged by the individual mutual
funds in the portfolio. Only the original poster can decide if the
"advice" he gets is worth the extra 1.1 percent. But unless his account
exceeds seven figures I simply cannot imagine that anybody at Fidelity
will spend much time assisting him. Far more likely, they'll pull down a
model portfolio off the shelf and recommend that. He could probably find
the same advice in about 20 minutes surfing the net.
Why would putting 80% in a total stock market index such as the
Vanguard one you mentioned and putting 20% in an EAFE index fund as
you suggest be preferable to putting 20% each into the Vanguard small
cap value index fund, the small cap growth index fund, the large cap
growth index fund and large cap value index fund in addition to the
international one?
If you try to assemble a portfolio of index funds where each fund has a
different style you have to decide how much to put in each fund. This
presents a problem. How much in micro cap vs. small cap vs. medium cap vs.
large cap? How much in growth vs. value? I realize that there are model
portfolios out there that could be used. And if you do your homework and
understand the allocations you can do just fine assembling a portfolio of
"style based" index funds. I'm not so sure your proposed allocation is
wise, however. You have 40 percent small cap, 40 percent large cap and 20
percent international. To my mind you're overweight small cap and you have
no mid cap position at all.

My approach is simpler. Instead of trying to decide how much of your
equity money should be in what fund, I just buy one fund that tracks the
Wilshire 5000. That way, I own just about every publically traded company
listed on U.S. stock exchanges. Doesn't matter if the companies are large
cap or small cap; growth stocks or value stocks; stodgy dividend payers or
speculative high tech plays. I own everything. Are some of these companies
going to fail? Sure. But there will also be some that do spectacularly
well. Study after study shows that it's VERY difficult to predict in
advance whether large cap will outperform small cap, or whether growth
investors will beat value investors. (Google "random walk down Wall
Street" or "efficient market theory.") So I buy the entire equity market
and forget about it. One fund, one low fee, all domestic stocks. Ditto for
my position in international equities. The EAFE index consists of
well-established names in the Eurozone, Australia and Asia. It's as close
as you're going to come to a Wilshire 5000 fund for international
equities.
Assuming I want to invest 100% in equities and not bonds?
I recommend against such an assumption. Even an investor in his 20s should
have a small position in bonds, say 10 or 20 percent. Vanguard's Total
Bond Market index fund is a good way to do this.
 
J

jt

I just buy one fund that tracks the Wilshire 5000. That way,
I own just about every publically traded company listed on U.S.
stock exchanges. Doesn't matter if the companies are large cap or
small cap; growth stocks or value stocks; stodgy dividend payers or
speculative high tech plays. I own everything. Are some of these
I agree with spirit of getting breadth with one or few funds, but Wil5k
seems a false solution. Graph it on top of sp500, including times when
smallcap was particularly strong or weak. There is almost no difference
in returns since the smaller cap positions are (de)weighted by mkt cap.
The point for small or midcap coverage is to weight disproportionately
which can still be done in one fund, even an index such as ffnox.
Ditto for my position in international equities. The EAFE index
consists of well-established names in the Eurozone, Australia and
Asia. It's as close as you're going to come to a Wilshire 5000 fund
for international equities.
I think that index has a similar problem in focusing on stodgy huge mkt
cap companies in often stagnant economies. It's one quarter Japan,
whose stock mkt has been down 70% the last decade or so, and whose
big companies are sometimes termed "zombies" (the walking dead,
financially beyond bankruptcy). The rest is mostly northern Europe
where demographic implosion is meeting overregulation. Sure, you
have a currency pop here recently, but that could be a cyclical thing
that will bite back. Been better to overweight in countries that
have been trying harder, such as east europe, latin america, NZ etc.
 
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P

Paul Michael Brown

I agree with spirit of getting breadth with one or few funds, but Wil5k
seems a false solution. Graph it on top of sp500, including times when
smallcap was particularly strong or weak. There is almost no difference
in returns since the smaller cap positions are (de)weighted by mkt cap.
I think the argument here is that an index fund that tracks the S&P 500
would be just as good as one that tracks the Wilshire 5000 in matching the
rate of return for all U.S. equities. I have not looked at the data cited,
so I won't comment. I will say, however, that as a firm believer in the
efficient market theory and the benefits of indexing I personally prefer
the Wilshire 5000 over the S&P 500, even if the smaller companies are only
a small part of the market-cap weighted index. But if somebody wants to
choose the S&P 500 as their proxy for domestic equities, that would be
fine.
The point for small or midcap coverage is to weight disproportionately
which can still be done in one fund, even an index such as ffnox.
Again, I am personally not comfortable trying to decide whether and when
to "weight disproportionately" stocks that are "small or midcap." If the
original poster is savvy enough to make informed decisions regarding
whether he wants to be overweight stocks with a certain market cap at a
certain time, then that's fine. My point is that the average investor is
just not capable of making those calls. Moreover, if the investment is
held in a taxable account buying and selling to allocate equity money
based on market cap can have annoying tax consequences. Far better, it
seems to me, for the average investor to buy the entire domestic and
international equity market and be done with it. (With, of course,
periodic rebalancing to maintain the desired asset allocation.)
I think [the EAFE] index has a problem in focusing on stodgy huge mkt
cap companies in often stagnant economies.
I guess that's one way to look at it. Another would be to say that the
EAFE index focuses on established and successful names that operate in
countries where accounting standards, legal rules and corporate
transparency are all similar to what we have in the United States. Perhaps
I am being a tad conservative, but investing in "emerging markets"
concerns me because of the very volatile nature of the equity markets in
those countries. That said, if an investor is sophisticated and
disciplined I think it would be prudent to allocate, say, 10-20 percent of
his international equity position to emerging markets. And in this area
there is an argument to be made for an actively-managed fund to capture
some of the inefficiencies that sometimes exist in foreign equity markets
with less coverage. But for an unsophisticated investor, I think that
making a big bet on equities from Latin American, Eastern Europe or China
is just as foolish as making a big bet on small cap domestic names just
because you once heard on CNBC that "aggressive growth is the way to go."
In *theory* it sounds wise to capture the increased alpha these stocks can
provide. But in practice the average investor doesn't have the knowledge
or discipline to take the wild ride. He allocates too much money to high
beta issues, ends up out of phase with the markets, and loses money.
 

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