International Teachers: How To Best Use Raymond James

International Teachers: How To Best Use Raymond James

Raymond James is a publicly traded company. Their international financial advisors aren’t fiduciaries.

Advisors who hold to a fiduciary standard put their clients’ interests ahead of their personal interest.

As such, they aren’t supposed to select high-cost mutual funds that pay them high commissions or high trailer fees, over more suitable, lower cost products that would make their clients more money.

If you ask your Raymond James advisor to sign a document suggesting that he or she will work on your behalf as a fiduciary, the advisor will say no.

That doesn’t make them bad people. But they aren’t legally obligated to work on your behalf.

That said, you could still work out a reasonably low-cost arrangement if you want to invest with Raymond James.

In 2014, when I was writing The Global Expatriate’s Guide To Investing, I reached out to Raymond James. Here’s an edited excerpt from my book:

In 2011 my neighbor, Mark, wanted to know what he paid in fees for his Raymond James Freedom Account. Taking his account statements, and using Morningstar, I found his total costs exceeded 3 percent annually: 1.75 percent paid to Raymond James for the account’s annual fee plus 1.3 percent for his account’s mutual fund expenses. I’ve found that Raymond James representatives often charge different amounts. But I wanted to see if Raymond James could offer a far cheaper service.

In 2014 I emailed Lara Yates, one of Raymond James’s international financial advisors. “Would you be willing to build portfolios of low-cost index funds for American expatriates,” I asked, “charging no more than a 1 percent annual fee?” I knew it was a tall order. But if she acquiesced, American expats might have another low cost investment option with a financial advisor. Such portfolios would cost 1.2 percent or less (including index fund expense ratios), which is nearly two thirds lower than what my wife and neighbor were paying when they invested with Raymond James.

Lara was excited by the idea, getting back to me a couple of weeks later. “I can do it for international teachers,” she said, “and the firm’s other international advisors say they can too.” [with accounts that exceed $25,000]

Two months ago, I spoke to a teacher at an international school in Jordan. He asked his Raymond James advisor to build him a portfolio of low-cost index funds. Based on the agreement I had made with the advisors, Raymond James would get a 1 percent annual wrap fee. Teachers would pay index fund expense ratio fees between 0.07 percent and 0.15 percent (for a diversified portfolio). Total annual costs would be as low as 1.07 percent.

The advisor did build a portfolio of (mostly) index funds for that teacher in Jordan. But he chose something different…something much more expensive. He kicked sand in the teacher’s face.

This doesn’t mean the advisor is an evil dark lord. But it confirms one study. It says people behave differently when their minds are imprinted by money.

After one of my talks I had dinner with a couple of teachers in Kenya. They had recently asked their Raymond James representative if he could build them a portfolio of low-cost index funds. They had read my book. They saw what Raymond James had promised. But the advisor said a portfolio of index funds would cost the teachers too much money.

The teachers already have an account with Raymond James. The advisor doesn’t charge an annual wrap fee. But the account contains some of the highest cost U.S. mutual funds that I have ever seen. The portfolio contains funds comprised of mostly U.S. stocks.

Here’s a snapshot of its holdings, not including roughly 15 percent in cash and fixed income.

These funds charge nose bleed fees. As such, advisors who sell them earn nice trailer fees. But the client gets the shaft. A low cost portfolio of index funds that Raymond James could offer (including the 1% annual wrap fee) would cost almost half this amount.

These teachers own The Eagle Growth and Income Trust Fund Class C (HIGCX). It charges a 1.82 percent annual expense ratio fee.

They also own The Eagle Series Trust Small Cap Growth Fund Class C (HSCCX). It charges a whopping 1.85 percent annual expense ratio fee.

The teachers told me that one of their previous funds was a dog. That’s why they sold it. In its place, the advisor recommended the Pioneer Flexible Opportunities Fund-Class C (PRRCX). It charges a giant 1.94 percent annual expense ratio fee.  It’s categorized as a tactical asset allocation fund.  Most mutual funds contain stocks that fit into well-defined categories.  A U.S. Value fund, for example, contains cheap U.S. stocks.  An International fund contains stocks outside the United States.  A Global fund contains stocks from around the world.  But a tactical asset allocation fund manager has the leeway to buy what he or she thinks will do well.  It might be loaded with U.S. stocks one year, international stocks the next.  Sometimes, it could have a high bond allocation.  Other times, the manager might choose not to have any bonds at all.  As I explain, in this article, such funds don’t usually perform very well.  

Each of the three funds above also charges a 1 percent sales load if they are sold within one year.

Each of these funds is also very expensive.  They’re good for those who sell them.  But they’re not great for their investors.

Investors are starting to say no to high cost funds. Even among investors who use actively managed funds, Morningstar reports that most of that money is getting pushed into funds that charge an average of 0.80 percent per year. That’s less than half of what my friends in Kenya are paying.

Advisors might try to tell you, however, that they can find mutual funds that will beat the benchmark indexes. That simply isn’t true. Only a salesperson would claim that. Don’t get fooled by an advisor’s fancy charts. Without a time machine, nobody can pick actively managed funds that will beat their benchmark indexes.

I explain that in my story, Four Mutual Fund Managers That Have Consistently Beaten The Market (don’t be fooled by the title). I also describe it in my story, Best Mutual Fund Lists Can Strip You Naked.

I explain the same concept again in, The Best Mutual Funds To Buy Right Now!

Morningstar’s research says that cost is the best predictor of future mutual fund success. The lower the cost, the better.

So…let’s get back to those teachers in Kenya. Their portfolio is expensive. It’s made up (almost) entirely of U.S. stocks. Not all of the funds have long-term track records. But by using portfoliovisualizer.com, I was able to compare their portfolio’s funds with Vanguard’s Total Stock Market Index Fund (VTSMX) from January 2011. The comparison wasn’t close.

Teachers’ U.S. Actively Managed Funds vs. Vanguard’s Total Stock Market Index

January 2011-April 2017

Source: portfoliovisualizer.com

As you can see from the chart above, over just six years, the actively managed funds gained 67.92 percent. The index gained 110 percent.

Below, you can see that the actively managed fund portfolio gained a compound annual return of 8.65 percent. Its worst year, over this 6 year period, saw a drop of -2.36 percent.

The U.S. stock index gained 12.61 percent. It’s worst year, over this 6-year period, saw a gain of 0.29 percent.

If Raymond James had charged a 1 percent wrap fee (and included Vanguard’s index instead of the actively managed funds) the portfolio would have gained 11.61 percent per year instead of 8.65 percent per year.

Teachers’ U.S. Actively Managed Funds vs. Vanguard’s Total Stock Market Index

January 2011-April 2017

Source: portfoliovisualizer.com

Now let’s assume we built a portfolio that was far more conservative.  When stocks rise a lot (such as they have done since 2011) conservative portfolios don’t perform as well as a riskier portfolio that’s heavily weighted in stocks.  Vanguard’s Balanced Index has 60 percent in stocks, with a full 40 percent in bonds.  Despite taking far less risk, it also beat the Raymond James portfolio from January 1, 2011 to April 2017.  It earned a total of 69 percent versus 67.92 percent for the riskier Raymond James portfolio.

If you’re an American international teacher who uses Raymond James, make sure they play fair. Make sure they build you a diversified portfolio of low-cost index funds. 

Specifically ask for this.

1. A low-cost portfolio of Fidelity or Vanguard index funds
2. The portfolio should charge an annual wrap fee of 1 percent per year.

There shouldn’t be any commissions to buy or sell.

I’ve listed specific portfolios below. They are all diversified and cheap. They only use either Vanguard or Fidelity’s low-cost index funds.

Vanguard Index Fund Portfolios

Fidelity Index Fund Portfolios

If you have more than $10,000 to invest in each fund, the costs would be even lower. Raymond James could build you a portfolio with Vanguard’s Admiral Series Index funds and Fidelity could use their Premium share class of index funds. The portfolio fund costs would then average about 0.07 percent per year.

In practical terms, an American international teacher with at least $30,000 could have a diversified low-cost portfolio of index funds that would cost about 1.07 percent per year. That would include Raymond James’ 1 percent annual wrap fee plus the 0.07 percent annual fund costs.

My new friends in Kenya pay almost twice that amount.

The 401(k) Platform For American Teachers

Raymond James offers a 401(k) platform for American, international teachers. It takes advantage of a loophole in the tax code. Teachers can invest in this platform, and if they keep the money in the account until age 59 ½, they won’t have to pay tax.

Teachers can select from a series of R Class American Funds. If you’re looking at fund selections, consider an aspect of behavioral finance. Don’t ask the advisor which funds you should pick. Choose one of the Target Retirement Date fund options. I explain why in my story, How To Best Pick Funds For Your 401(k).

But the 401(k) Might Not Be For Everyone

If you’re under the age of 40, and you know how to build a low-cost portfolio of index funds (perhaps you own a Vanguard account or you buy ETFs through Interactive Brokers or another discount brokerage) then the 401(k) might not be best for you. At first, that might sound crazy. Why give up the promise of a tax-free account for a taxable account on your own?

Compounding fees are the reason. The 401(k) must be held until the age of 59 ½. But its fees are high. At some point, there’s a threshold. The longer you own the account, the greater the impact of those fees. If you’re below the age of 40 (and you invest in a taxable, low-cost portfolio of index funds) your lower fees might offset the tax advantage offered by the 401(k). I detailed that near the end of this story, Comparing 401(k) Plans For American International Teachers.

If you’re over the age of 40, the 401(k) makes a lot more sense.

Keep in mind that non-American teachers shouldn’t feel left out. They can build low cost portfolios of ETFs (exchange traded index funds) in a tax-free jurisdiction. These are more flexible than a 401(k). The money can be pulled out, penalty free, whenever the expat wants it. I explain this in my book, The Global Expatriates Guide To Investing. If you’re considering this approach, you could hire PlanVision’s Mark Zoril. For $96 a year, he’ll guide you in the process.

To date, Raymond James doesn’t offer a low-cost investment option for non-American expats. The funds they do offer non-Americans charge high fees. With time, let’s hope, they might offer something better.