Forum Mailbag: Value of Financial Advisors, Taxable Account Allocation, Keeping Life Insurance, And More!

There is so much great information on personal finance forums. I regularly participate on several message boards, including Bogleheads, White Coat Investor, and Rockstar Finance. This is a roundup of my favorite discussions happening around the internet.

1. Bogleheads: The Value of Financial Advisors

Question: Bucky6225 is a CFA who has been managing client money for about 10 years. He’s a proponent of using low-cost index funds as part of a strategic asset allocation for his clients. He charges approximately 1% of assets under management, and feels like he is not adding enough value to justify this cost. He wanted to know from the Bogleheads community if there is any benefit to a financial advisor, and if so, how much are those benefits worth?

WSP’s Take: While obviously I’m a huge proponent of do-it-yourself investing using low-cost index funds, I think financial advisors can provide value to many investors.

For new investors, financial advisors can help them form a financial plan early in life, including determining how much of their income they need to save for retirement. While this site and others give plenty of guidance to new investors on how to setup their finances and investments, it probably would be faster to just get that advice from a financial advisor you can meet face-to-face. Their advice would also be tailored to your specific situation, because it is difficult to speak beyond generalities within a blog format. Sure, you could post your questions on a message board, but that can be pretty intimidating for a new investor to bare all of their finances on an anonymous forum.

From an investing perspective, one of the big areas where financial advisors can add value is through helping their clients maintain a steady hand during turbulent market times. If a financial advisor can help a client avoid short-term trading in their account or panicking during a market crash, then the financial advisor can be well-worth their management fees.

Financial advisors don’t help their clients by proposing an innovative new investment strategy to boost returns. They serve clients primarily by helping them overcome the psychological hurdles required to make good personal finance and investing decisions.

2. White Coat Investor: Taxable Account Allocation

Question: BaulahaMD is maxing out his retirement accounts and investing the money in target retirement funds, but would like to start a taxable account for any additional money he is saving. He plans to work for another 25 years and overall would prefer a more aggressive asset allocation. He is seeking advice from the White Coat Investor community regarding his asset allocation for his taxable account.

WSP’s Take: I think it would be reasonable to also invest in a target retirement account for your taxable account as well. Given your investment horizon, a Vanguard Target Retirement 2045 target-date fund would be a reasonable option since you are using these types of funds in your retirement accounts. You desire to be aggressive with your stock investments for the next 10 years, and that’s about when the target-date fund begins to become less aggressive (the Vanguard Target Retirement 2035 fund has a bond allocation of 20%, compared to 10% for 2045).

You could also buy the individual funds yourself, which would reduce the fees of your portfolio by approximately 0.10%. Depending on the size of your portfolio and your desire to maximize your returns, this may or may not be worth the effort.

3. Bogleheads: Keeping Life Insurance with Positive Expected Value?

Question: Empiricist currently holds term life insurance, but he and his wife recently decided they don’t plan on having children and his wife can support herself in case of his untimely death. He pays $25/year and the value of his term life insurance (benefits x probability of death), according to the Social Security Administration, is $85/year. He was wondering whether it was worthwhile to hold the term life insurance because he believes it has a positive expected value.

WSP’s Take: First, your death expectancy is likely less than the listed Social Security Administration tables. These tables are designed for the entire U.S. population at your age, and there are probably people at your age who are in the military, have terminal cancer, or have other factors that put them at a much higher risk of death than the average person who is healthy. In fact, your insurance company probably knew this and charged your premiums accordingly (i.e. they would charge much higher premiums or not sell insurance at all to someone in the military or someone with cancer).

But I would still not keep the insurance even if there is a positive expectation. The probability of a payout is so remote that I, and most people, would rather just keep the premium every year. The premiums I don’t have to pay are worth more to me while I am living then the insurance benefit my wife would receive in the remote chance I died.

4. White Coat Investor: Contribute to 403(b) or Pay Off Student Loans as Resident

Question: Recess is a PGY3 making $$60,000 and his wife is a 4th-year medical student. Their monthly expenses are currently $1500 a month. Student loans are at a combined $200,000 at an interest rate of approximately 5.5%. They have a $40,000 emergency fund and $50,000 in investments, mostly in retirement accounts. They have been maxing out his and her Roth IRA, 403(b), and HSA. Among other questions, they would like to know if they should continue to max out their 403(b) or pay off their student loans.

WSP’s Take: I believe that the benefits of a 403(b) far outweigh the costs of paying additional interest on your student loans. I once tried to calculate the value of a 403(b) compared to a taxable account, and estimated it to be approximately $1.40 of your initial contribution. Given that you are only paying 5.5 cents a year an interest per dollar put in a 403(b) instead of your student loans, I would continue to max out your 403(b) while you are a resident. Once you become an attending, I expect you will be able to max out your 403(b) and aggressively pay off your student loans.

Wall Street Shares: Articles I Think You’ll Enjoy Reading This Week

1. My Curiosity Lab: Why I Hired A Nanny — Dr. Curious shares his experience of hiring a nanny for their two children. This is not an uncommon issue for a double high-income household.
2. Live Free MD: Don’t Buy Stuff You Can’t Afford — You’d think this would be obvious advice, but our society has become so accustomed to debt that many people don’t follow the simple rule.
3. Actuary on FIRE: Mathtastic Advice on Sequence of Returns Risk — for those who enjoy about reading more advanced topics like sequence of returns risk
4. Passive Income MD: Three Red Flags in Your Physician Contract — it’s job hunting season for senior residents, so this article from Contract Diagnostics is pertinent to those evaluating their first physician contract.
5. Rogue Dad, MD: Future Proofing Your Children: Terrorism — an introspective look of how one Muslim doctor handles living and raising children in the post-9/11 world.

What do you think? Do you agree or disagree with any of my responses? What’s your take on the topics in this week’s forum mailbag?