Has anyone seen "My Date with Drew"? I thought it was a cool movie, shows how someone can achieve what seems to be impossible on nothing but desire and tenacity.
I spent over an hour interviewing a financial advisor from Merrill Lynch's private client group. The goal of the meeting was to find out what Merrill could do for me, and his proposal for financial strategy.
I had given him a list of some of my mutual fund holdings, and he went through some analysis for me. His goal was to convert me from mutual funds to managed funds and hedge funds. Here are some key points that I've gleaned from the meeting, my own past experience with managed funds, and some discussion with an ex-Merrill Lynch client:
1. Minimum account they're willing to work with is ~600K. Typical managed fund and hedge fund minimums are 100K, so 600K would be enough to start 3 managed funds and 3 hedge funds, all with different management styles.
2. Average account size in this private client group is $2M.
3. Managed accounts allow you to tax loss harvest at the end of the year. You can advise the manager of your tax situation (i.e. that you have capital gains you want to offset), and instruct them to take individual stock losses against your gains. This is something you wouldn't be able to do with a mutual fund, since you have no control over the underlying fund assets.
4. You purchase the underlying shares in the managed account, so your cost basis is the actual share price on the date of purchase. When those shares are sold, you are taxed on actual gains (or losses). For mutual funds, when you purchase the mutual fund, the fund already holds those underlying shares, likely with a cost basis lower than the market price at the time you made the purchase. When the mutual fund makes a distribution, you are taxed on the gains the fund made from its original purchase price, not at the price you paid. Your fund could have lost value, but you'd still have to pay capital tax on the distribution. This is awful, and so is another big benefit of managed funds.
5. Management fees. Merrill charges its own 1+% fee, and the managers charge another 1-2%, so the fees add up. However, mutual funds have hidden fees besides the management fees shown on Yahoo finance, including transaction costs and taxes. www.personalfund.com has more details of all the costs associated with a particular fund. Depending on the fund, Merrill's fees may actually work out to be lower. But if you're going for lowest costs, ETFs or Vanguard funds would be good bets.
6. Tax complications. If you own hedge funds, you will probably have to file for tax return extensions every year, because you don't receive final tax documents (K-1s) until after April 15.
7. Hedge funds did well in 2000-2002, but many of them seem to be lagging the market from 2003-present. This is probably related to the huge amount of money being poured into hedge funds the last several years. One thing I like about hedge funds is that their volatility seems to be generally lower than the overall market.
8. They don't offer tax liens or real estate deals. Need to go with Citibank for those.
My conclusion? If you've got all the time in the world, it's better for you to do your own research and manage individual stocks. For those with net worth less than a few hundred K and no time, stick with ETFs, mutual funds, and some individual stocks. For those with net worth > $1M and no time, it's still kind of a toss-up, fund selection is key whether you go with mutual or managed funds. For those with net worth > $5M, you pretty much need someone to help you diversify.
I'm going to stay the course and not go with Merrill yet. Will interview more financial advisors. It's a time-consuming task.