Should I Use A Financial Advisor Or The Thrift Savings Plan?
I spend a lot of time answering reader questions. Some of them are unique personal decisions, but most of them are about very common situations. I also get personal-finance feedback that just has to be shared with everyone.
For example, fewer than half of today’s military servicemembers even have a Thrift Savings Plan account, let alone make contributions to it. One of the reasons is a lack of knowledge (nobody ever really showed them how to sign up), and another reason is just not appreciating how the contributions can compound over time. A third reason is that people are too busy with their careers, their qualifications, their families, and their lives– there’s no time to worry about investing for a financial independence that might be decades away!
But you don’t have to hear it from me when you can read the wisdom of someone who’s been there:
So, I logged into my TSP account. I must say that I’m very disappointed in myself for not putting more money into the TSP. I’m approaching 14 years of service and I have at least six more years of active duty. If I put at least $200 a month towards TSP for those remaining six years, it will amount to an additional $14,400 towards my retirement.
I’m mentioning TSP because I don’t want you junior folks to look at your TSP account and be as disappointed in yourself as I am. Invest in your future!
Then there are the questions about financial advisors. You see the advertising every day (including on this website) and you may even see it at your command’s financial training. It’s very tempting to just invest with someone who knows what they’re doing and will grow your money faster than the market!
But again, I’m not going to glaze your eyeballs with statistics about how the vast majority of financial advisors consistently underperform the market. Here’s more feedback from one of way too many readers who found out for themselves:
I’ve been in the military for 10 years now. I’m getting out in a little under a year. When I first started, I opted to get a financial advisor from one of the many “how to budget your money” training sessions they put us through. Seemed to make sense at the time. Take my money, manage it, take a little out for doing a job well done. But the more I dig into this site the more I wonder if it’s really worth it. I’ve never used the TSP. It always felt too limited to me. But considering my advisor hasn’t done as well in the performance area, part of me is seriously thinking about it. Is it worth it / can I somehow take my lump sum Roth from where it is now, and transfer it to the TSP? Or what would you recommend? The non IRA portion I’m debating about moving too to some Vanguard fund.
Before this reader starts moving money around, they need a transition fund to pay the bare-bones living expenses for at least a few months after active duty. That cash will cover the delays (and other surprises) while they affiliate with a Reserve/National Guard unit, or get paid by the GI Bill for college/certifications, or start their own business, or network to a corporate career.
Financial advisors charge fees for their services, and the only question is who’s paying them. Sadly, too many advisors are financially motivated to keep the clients blissfully ignorant while selling products with high commissions. Admittedly some clients are “too busy” (or too apathetic) to do their own investing. Other clients want an advisor to “hold their hand” and help them stick to the plan during recessions and bear markets. A few clients earn so much that they’ve outsourced the financial management. (They’re willing to pay for the outsourcing because they can earn more income at their career.) Even those clients pay more for the “help” than if they’d invested in passive index funds through automatic deductions.
A better way to use a financial advisor
There’s a better way to get financial advice: You can learn how to set up your own investments and automate them. You can consult fee-only financial planners to make sure you’ve covered all the details. They only get paid by the hour for their labor and experience. They don’t earn commissions from selling products, so they have no reason to upsell you. Meanwhile when you learn the basics and make a plan (with or without the help of a fee-only CFP) then you’re much more likely to stick to the plan and reach your goals.
No advisor has consistently outperformed the market indexes any better than random chance, and (even worse) it takes too many years to figure out whether you’ve chosen the “winning” advisor. If you do find the Warren Buffett of the Millennial generation, so will everyone else– and the next Buffetts will end up with so much money thrown at them that they won’t be able to invest it quickly enough to continue beating the market. In the meantime, you could put your savings into passive index funds and simply focus your effort on achieving a high savings rate. You don’t need to beat the market– you only need to beat inflation. When your diversified investments have low expense ratios then you’ll earn over 99.9% of the index return with about 5% of the effort.
The TSP is plenty diversified, and it includes all of Vanguard’s “three-fund portfolio” assets.* It also includes the L funds to automatically rebalance your asset allocation as you approach retirement. If you feel the need to push your limits (Real estate? Commodities? Precious metals?) then do that with your Roth IRA and taxable accounts through Vanguard or another large financial institution with low expense ratios. However, those niche assets will probably only make up 10%-25% of your portfolio’s overall asset allocation.
This investor can (and should) transfer their traditional IRA into the TSP. (Here’s the traditional-IRA-to-TSP transfer form.) They’ll pay the world’s lowest expense ratios while sorting out the rest of their investment portfolio.
The TSP doesn’t have the procedures or systems to transfer a Roth IRA into the TSP, but TSP account holders can also transfer a civilian employer’s Roth 401(k) (or a 403(b), or 457(b)) to a Roth TSP account.
A Roth IRA can easily be transferred to a Vanguard account (or any other large financial institution like USAA, Fidelity, or Schwab) and once it’s there then you can sell the shares of your old funds and buy index funds with low expense ratios. Since that’s all done inside a Roth IRA, it’s not taxable.
The best way to leave a financial advisor
The best way to tactfully leave a financial advisor is to contact the new fund company, set up a Roth IRA account number with them, and then have them handle the paperwork of the transfer. You won’t have to talk to your advisor.
Other (taxable) investment accounts can be transferred, but there are probably capital gains when a taxable account sells actively-managed funds (or individual stocks) to buy index funds. The new company can help execute an “in kind” transfer of all your taxable account shares to your new account, where you can gradually sell the old shares (in a tax-efficient sequence/timing) and buy shares of passively-managed index funds.
I’m not a certified financial planner, but I’m free. (I’m financially independent. I’m not going to charge for free advice.) Contact me or e-mail me (NordsNords, Gmail) if you want to dig into the details with your accounts, or consult with a fee-only CFP.
The two military veteran CFPs I know best are:
- Rob Aeschbach at MilitaryFinancialPlanner.com and
- Forrest Baumhover at MilitaryInTransition.com.
Their first hour is free, and then you pay an hourly rate for their time & experience– no upsells or commissions.
Call to action:
- Are you signed up for the Roth TSP?
- Are you on track to maximize your contributions for 2016?
* (Note: here’s more info about the details of a Bogleheads three-fund portfolio.)
The Military Guide to Financial Independence and Retirement Price: By Doug Nordman: This book provides servicemembers, veterans, and their families with a critical roadmap for becoming financially independent.
Financial Advice To Start Your Military Career
“Can I Transfer My Roth IRA To My Roth TSP?”
Ask your Dad if you should contribute to the Roth TSP
Early Withdrawals From Your TSP and IRA After The Military
Funding The Gap: “I Need Money From My TSP!”
“Should I Invest In The Thrift Savings Plan Or In Taxable Accounts?”
How (And Why) To Transfer Your TSP To An IRA (after you’re financially independent!)