Within the Iowa City area there are several financial institutions that are used by many of us, such as the Green State Credit Union (GSCU, formally the University of Iowa Credit Union or UICCU) and TIAA (Teachers Insurance and Annuity), and IPERS (Iowa Public Employees Retirement System). UI employees can choose between TIAA or IPERS to manage their retirement plan. These organizations have many positive aspects, but one can easily make incorrect assumptions about them. For example, GSCU is listed as a non-profit which may lead people to believe that they have your best interest in mind. TIAA by being affiliated with the UI, may lead one to believe that everything they do is in your best interest as well. Unfortunately, this is not always the case.
Let’s start with GSCU and look at some of their practices. One of their current pushes in advertising is targeted at TIAA account holders with the UI. They are “informing” TIAA customers that they can help manage those accounts through their Wealth Management division. I have received several emails and direct mail pieces regarding this “service”. After replying to one of these emails inquiring about what the GSCU will do for me and how much they will charge for this. I received a detailed response:
As a UICCU member, our team works to coordinate the comprehensive financial planning for you and your family. We operate on an independent financial platform through Commonwealth Financial, allowing us to offer and select from non-proprietary investment options and use independent research in creating suitable portfolios. The Investment Allocation process within our team involves quantitative and qualitative screening through multiple resources, including our FI360 Fiduciary software, and ongoing management allows us to monitor holdings and performance on a daily basis. Consultation with our team is free and would be a great first step to learning more about the services and unique capabilities. Should you elect to hire our team to directly manage your portfolio and provide comprehensive wealth management services, our fee is typically 1% of the account value, annually, and is all inclusive.
I was unclear of what exactly they would do for me other than charge me 1% of my total assets annually, which is expensive and in my opinion excessive and unnecessary. For example, if you saved $500 per month for 30 years, the 1% fee (difference between a market return of 10% and 9%) would cost you $180,369.36. If they recommended funds that charge higher expenses, the costs would be even more. If they recommended a fund where there is 1% fund fee (which isn’t uncommon), the total costs to you would be $327,153.75 out of your retirement funds. It works the same way if you have an existing retirement account and are close to retirement. Your returns will be substantially diminished over the 20, 30, 40 years of your retirement. Finally, once you start annual withdrawals from your retirement funds, (which typically can be 4% of your funds) GSCU would be getting the equivalent of 25% of your income.
The reply above also stated they are with Commonwealth Financial. After reading through their website, I found out Commonwealth Financial is a service for financial advisors which provides the FI360 software that is listed above. It gave me pause when I saw an advertisement on the website saying they have the highest gross revenue for advisors within their industry. This may make the advisor wealthy, but it won’t help your accounts. It has been proven over and over in multiple academic studies that the higher fees that you pay the lower your return will be.
Within the GSCU response was also the word fiduciary with the software. A fiduciary is an advisor who is required by government regulations to put your interests first. The website said that they don’t require their advisors to meet sales quotas or recommend propriety investments. These are good things, but nowhere did I see the word fiduciary as to how they operate as a company or advisor. GSCU mentions a quantitative and qualitative screening regarding asset allocation along with monitoring accounts daily. Frankly, this is just overcomplicated financial jargon. The truth proven over and over in academic studies is that you can invest with as few as two index funds at a much lower cost and get superior returns.
The response also mentioned daily monitoring of the accounts; this is the last thing a person should do! Does this mean they would be trading the assets around in my account based on their expertise and market values? Once again studies show it doesn’t work and it is unnecessary. Many respected academics say you should rebalance your accounts maybe once a year at most. In other words, once you figure out what you want for your low-cost index fund investments and asset allocation, set it and forget it. Trading your funds more often simply costs more and returns less.
Recently GSCU started promoting their Green Account which is a money market fund with a competitive rate compared to other local financial institutions. Unfortunately, this is offered to only new clients and not offered to existing clients I found this very disappointing that existing loyal customers don’t receive the same rates as new customers. I have found there are better options available, such as Vanguard. They offer a Prime Money Market account with no minimums and at a consistently higher interest rate. No games or gimmicks, just ongoing competitive rates. If you decide to go that route, it is easy to set up online transfers between Vanguard and your local bank or credit union.
GSCU has also sent out direct mail advertising for home equity loans that they suggest could be used for many things including vacations. Is this wise to suggest financing a vacation? In my opinion this is irresponsible and bad advice. I have received blank checks in the past from GSCU that could be used for cash against our credit card. Again, this is financially irresponsible to encourage borrowing money. GSCU has also promoted home loans with no down payment; does anyone remember the housing crisis of 2008? The housing market collapse was in part due to overborrowing beyond ones means and financial institutions were glad to provide such loans with creative financing. They allowed loans of 80% of the house price on a first mortgage and then loaned the required down payment of 20% on a second mortgage. This “helps” their customer put nothing down and avoid Private Mortgage Insurance which is required when you put less than 20% down. Is it financially responsible to provide people an option to buy a home they can’t afford? Truth be told, being a “non-profit” doesn’t necessarily mean an institution has your best interest or values in mind.
TIAA is a large national financial institution that was created to help teachers fund their retirement over a century ago. They branched out to work with more academic institutions and today are available to any retail customer that wishes to invest with them. TIAA is consistently ranked highly for their services nationally. They have many fine attributes but like the GSCU, there are some things you should be aware of.
The University of Iowa retirement plan is unique to UI although ISU and Northern Iowa are similar. This means you are offered a certain group of funds to invest in that are unique to your plan and there are some good mutual fund options to choose from. TIAA offers index funds at a low cost that is competitive with the best prices available and started to offer funds from Vanguard which are even lower cost. One can build a well-diversified account at a low cost very easily.
TIAA has a local office where you can meet with an advisor at no additional cost for information and assistance. My wife works for the UI and we have used this service several times over the years. Our advisor has provided us with information that was very helpful and helped increase our investment returns. As with any financial services company, you should keep in mind that the bottom line for TIAA is what they are ultimately concerned about. Many years ago, our advisor informed us that there were index funds we were invested in that were available at a lower cost. They were the same funds we owned but we were being charged a higher fee. We were happy to find this out, but why didn’t TIAA notify the UI that this was available and why didn’t the UI notify their plan participants? This program still exists today in another form. If your advisor convinced you to invest your money from outside the UI plan you would be considered a retail investor. A retail investor pays 7 times more for a Total Stock Market Index Fund than a UI plan participant. Obviously, this is not a good choice.
TIAA local representatives are thinking of TIAA first, they are not going to go out of their way to recommend other investments options. Their job is to increase your investment holdings with TIAA and to make sure TIAA continues their contract with the UI. They offer seminars once or twice a year that can be very informative along with a question and answer session. I would recommend attending to learn more about their services and accounts, keeping in mind that what they do is also self-serving. One seminar on annuities was quite good on explaining how they work and if one may be right for you. They do offer an immediate annuity that may be right for some people. This was educational because most annuities are overpriced and should be avoided. Another seminar I attended was not so good, as it seemed like more of advertising pitch on their investing prowess. They spoke of the almond farms they own and other alternative investments. Every study I have read states to keep your investing simple and diversified. Almond farms seem very curious to me.
TIAA will be glad to set up an asset allocation for you based on your risk assessment with a software program. This will put your account into multiple different funds in widely diversified asset classes. Sounds good on the surface but when you look at the expense fees of the funds, they can be quite expensive compared to index funds, which results in lower returns while unnecessarily adding complexity. What may be easier is if you look at one of their Target Date Funds. Target Date Funds are retirement accounts that are set up to be automated for you and adjust risk as you age. TIAA’s Target Date Funds are made up of less than five index funds with a total expense of .10%. This is a good deal and the diversification looks excellent. So why do the advisors put people in more complex portfolios? It would lead me to ask how are they compensated?
One other aspect that people may not be aware of is the ability to leave TIAA after you retire. This is an option that the advisor may not mention. I don’t advocate leaving TIAA as they offer many good options and most other financial services will probably be worse, many far worse. There may be some better options such as Vanguard, but unless you thoroughly understand your investing, I would be careful.
Overall, TIAA advisors have given me worthwhile advice; just make sure you understand what they are telling you, not just accept it as your truth.
I mentioned IPERS as part of a retirement plan that is offered to many state employees. There has been much publicity about it in the news within the past several years regarding being underfunded. This is not uncommon nationally as many states are experiencing the same problems. This is another reason to take charge of your personal finances and investing. Whether it is a private financial services company, or a government institution low returns and mismanagement is prevalent. Understanding your personal finances should not be left to someone else.
There are so many companies out there trying to get a chunk of your money. David Solomon, CEO of Goldman Sachs, did an interview on CNBC in early 2019 and referred to index funds as a product. They are, but that is what you must understand when dealing with your money. They are all selling you something. These companies will market to you by your net worth or estimated net worth. They even have names like middle class affluent, to categorize you by net worth and income. Your individual account is just part of what they call Assets Under Management (AUM) and the more accounts they add the larger the AUM becomes and the more money they make. Fisher Investments runs a commercial stating they want to help you if you have $500,000.00 worth of investable assets. They use the phrase -ready to “graduate” to the next level of investing. By using the word graduate, there is an implication that your investing is elementary, and they know things only sophisticated investors know. Two additional things to notice: they don’t want anybody below $500,000.00 (it’s not worth their time) and they don’t want you to include your house in your net worth. They can’t extract fees from your house. They may be a respectable financial advisory firm but, in the end, they want your money to extract fees. Bottomline is it is just business to them, and you are just a number, which is the same with all financial companies- even yours.
Within my website you will find detailed information and resources to answer many questions. Start today to take control of your finances. It’s too important to be neglected or left entirely to someone else. If questions- please feel free to contact me; I will do my best to answer them or point you to someone who can.