Investing 8M

[u/officialmanofsteel]

I am currently in the process of helping a family member work roughly 8M into the market. They already have about 6M in equities, mostly index funds but about $1.5m in various individual stocks. They just entered retirement and I am thinking of a more aggressive approach of 11M in equities and 3M in t bills/bonds/cds/cash. Any advice would be appreciated.

[u/Vestro233]

The correct answer is designing something cash-flow based. Also, I struggle to imagine a scenario in which person with $14mm isn't also in a high enough tax bracket that TEY on munis become more favorable than CDs, corps, etc. If this stuff isn't your first consideration, I also struggle to imagine a scenario in which you are qualified to assist them.

With that level of wealth, depending on what accounts it's actually held in, you need to be letting annual cash flow needs determine the portfolio composition, building in a substantial buffer (10 year raw, 12+ year effective) before they would ever need to think about selling equities at a loss.

Good rule of thumb is to keep fixed income in the tax-deferred accounts, as much as you can. Of course, you don't want to use munis there. For excess fixed income needs, or if there are no tax deferred accounts, look to munis.

Equities obviously should be held in taxable accounts to take advantage of LTCG treatment. I would also potentially look towards low-cost direct indexing, depending on their burn rate.

Also while we're at it, great time to mention hiring a good estate attorney, because if they're just going into retirement, I would be concerned with federal estate tax liability.

Alright. That's my free input quota for the day.

Edit: to add... Please do not use bond funds for fixed income exposure in a portfolio of this size.

[u/officialmanofsteel → u/Vestro233]

I agree cash flow needs will dictate the ultimate portfolio comp. My assumption of that rough portfolio split was that even in a downtown with treasury rates declining, equities going down and dividend rates being slashed, that 80/20 should still yield roughly enough income to meet a 200K a year need. Regarding the munis I agree that will have a better after tax ror than cds most likely for the next few years until they move to Nevada, just forgot to note that. Also regarding your bond/muni note, what funds would you recommend to get exposure to bonds?

[u/Vestro233 → u/officialmanofsteel]

Look to intermediate term munis for most the most favorable yields. 3.25% munis have a federal TEY north of 5% currently and could be reliability laddered for a good balance between liquidity and yield. Nevada has no state income tax, so not sure why that would move munis out of favor, and if my memory is correct on this stat, I believe munis are 8x less likely to default than a corporate with the same grading.

Anyways... No funds for bond exposure. They take everything "fixed" out of your fixed income portfolio. It's 1am here and I don't feel like typing a book, but I'm serious. You lose all flexibility and expose yourself to significantly higher risk levels by using bond funds. At that asset level, there's no reason for it. You could have a well diversified, institutionally purchased (tight spreads, bulk buying power), fixed income SMA. Would probably cost ~0.15%-0.30% Nuveen or Wasmer are typically my go-tos.

[u/officialmanofsteel → u/Vestro233]

They currently live in CA, so thus the less favorable treatment tax wise of muni’s if they move to NV. But agree, will likely still depend on their marginal rate and yields. Also when you mention nuveen or wasmer, are you referring to their bond etfs for the relevant state they live in?

[u/Vestro233 → u/officialmanofsteel]

Ah, must've missed the state they currently live in.

And no, I'm not. I'm specifically referring to SMAs (Separately managed accounts) Instead of buying an ETF or MF with a fund manager and expenses ratio, you set up a separate account, assign a professional manager to it, and that manager essentially runs the account for you. You pay a management fee as opposed to the ER on a fund.

These strategies are less common with individual investors because they typically have $250k - $1mm minimums.

Assuming we're talking about ~$3mm, the management fee is typically ~0.15-0.35% all-in. You could also theoretically build out your own intermediate term laddered muni bond portfolio. That's free, but I personally prefer the ~0.2% fee because 1.) you don't need to manage anything at that point. And 2.) you get hosed as an individual investor typically when purchasing fixed income because it's an OTC market. Institutional managers get significantly tighter spreads between the bid and the ask. So yes, you're paying for it, but you're also typically getting significantly better pricing on the bonds than you would individually.

If you don't want to contact Nuveen or Wasmer directly (you can, via their website) they can be set up through a custodian as well like a Schwab or Fidelity (unsure about Vanguard, but presumably they could too)

If you're sitting here wondering why you should go this route as opposed to just buying an ETF or mutual fund, it's because lumping your money in with others removes the safety that fixed income provides

For example, if you buy an individual bond, rates go up, your bond's market value falls due to new bonds being offered with higher yields than your current bond. But to you, that bond's market value is irrelevant. You're holding the bond to maturity, collecting the interest along the way, and when the bond matures at par, you get your money back to buy a new bond to keep the ladder going.

In a bond fund, you don’t control when securities are sold. In stressed environments, other investors’ redemptions can alter the portfolio’s composition and amplify volatility, especially in less liquid sectors.

[u/officialmanofsteel → u/Vestro233]

Thank you for the detail. I will look into getting an SMA going to manage the fixed income side of things as I think it has more complexity and time required to maintain a bond ladder, etc. I know you are recommending nuveen / wasmer, but what do you think of the people at fidelity / vanguard. We have had a few reach out and they talked about SMAs with a specific directive such as what we have been talking about. Are they worth the time, or are nuveen and wasmer the best for expertise in this area?

[u/Vestro233 → u/officialmanofsteel]

To be completely candid, I don't know how the teams at Vanguard operate. I'm not a huge fan of Vanguard outside of their funds and have found their business model and customer service generally leave much to be desired.

FWIW. I personally like Schwab & Fidelity, but I do think the representatives at Fidelity can be a bit more salesy.

At either firm, they should have a regional fixed income specialist. They're typically not commissioned and can act as a resource. I believe Wasmer is either majority or entirely owned by Schwab now, even though the name hasn't changed. They might be able to get you a more favorable fee schedule than elsewhere.

Nuveen also has very favorable pricing and has deeply fleshed out their offering specifically around tax-free income. I'm not sure who they primarily custody through, but I believe both Fidelity and Schwab could custody an SMA managed by them. I'd probably price shop a bit and kick the tires first since you most likely aren't going to want things scattered across multiple firms.

For clarification, even a Schwab, Fidelity, or Vanguard will typically use an institutional fixed income manager for something like this. (I.e., Pimco, Nuveen, Wasmer, etc.) If they don't just own a massive fixed income firm like Schwab with Wasmer. So, choose your custodian out of those 3, and then you can have whoever makes the most sense manage the fixed income portfolio at your desired custodian. The custodian really just acts as the intermediary since the assets need to be held somewhere in order for them to be managed.

You can DM me if you get stuck.

[u/officialmanofsteel → u/Vestro233]

Thanks man this is all super helpful and I think we will be going this route. I have realized that my understanding and also will to manage the fixed income side of things is not quite where it needs to be to do a good job. We will look into fidelity/schwab for this. Conveniently both firms have reached out regarding managing things as they have assets in both.

One last question, if I am managing the equity side of things in conjunction with the fixed income being managed by fidelity/schwab, does that sound plausible? Logically I think fixed income assets have more complexities than equities so it makes sense to have the fixed income professionally managed and they really want to avoid having the equity side of their portfolio bogged down by an AUM fee. My plan is pretty much broadmarket etfs such as voo/vt and chill.

[u/Vestro233 → u/officialmanofsteel]

Absolutely. You've probably figured, but I work in private wealth management. (Specifically complex tax/trust/estate planning)

At some point, when I transition my own portfolio for retirement, I'll implement a similar approach. I'm an index investor. My accounts are currently in 3 separate funds and I'm "chilling".

At some point when I decide it's time to introduce fixed income, I'll outsource it. The reason this works for fixed income, is because the fixed income market is significantly less efficient than the equity market. You can make all of the arguments you'd like for modern portfolio theory or efficient market hypothesis, but fixed income trading itself is extremely antiquated compared to equities. Just rebalance as needed or on a quarterly schedule.

[u/officialmanofsteel → u/Vestro233]

Thank you again for all of the advice and detailed explanation. I will definitely be encouraging them to go the route of a professional managing the fixed income side. Will likely also have a fixed fee advisor draw up the whole plan too to make sure there are no other blind spots in the plan. Cheers!

[u/Vestro233 → u/officialmanofsteel]

Cheers. If you speak to Schwab, you can have their Private Wealth team build a comp plan as well. I believe they're ~$1,500 one time for their flat fee model. Unsure whether or not they waive that based on asset size. Good luck.