Dear Dr. Don,
We are 80-year-old grandparents in declining health and are distributing assets to our two children and three grandchildren. Our daughter sought the advice of her certified financial planner to invest the $22,000 we gifted our 12-year-old grandson.
He recommended various funds, including those that focus on stocks, municipal bonds and a money market fund. I've enclosed a list of the funds in the portfolio. Is this how you or your colleagues would invest a 12-year-old's inheritance?
-- Andrew's Grandpa & Grandma
Dear Andrew's Grandpa & Grandma,
It's hard to say whether the portfolio is appropriate for your grandson, especially since I don't know the details of the conversation your daughter had with her planning professional.
During such a discussion, it would be important to talk about her family's financial picture, including taxes and the goals for the gift.
Knowing how the planner is compensated is also important, because some of the mutual funds on your list invest in capital market securities -- stocks and bonds -- and have sales loads. This would be normal and customary for a financial professional who is compensated using a commission-based model.
The money market fund is a bit puzzling. Why put money to work at 0.01 percent in a money market fund that has a gross expense ratio of 1.02 percent? Meeting the portfolio's need for liquidity is one possible answer, but it still seems a little odd.
You've also got a mix of taxable and tax-exempt interest income, which is puzzling.
My advice is to not worry about how your grandson's portfolio is invested, and spend that time instead enjoying your family.
I asked a colleague, Certified Financial Planner William Suplee, to review the portfolio and my reply. Suplee is also president of Structured Asset Management, a financial planning and registered investment advisory firm in Paoli, Pa. Here are his comments:
On an account this size, I would prefer just two funds -- a total stock market and a total bond market fund. But it is not my call. I am also puzzled by the bond mix. The problem is we do not know anything about the situation other than what is contained in the e-mail. What (are) the parents' and the child's tax position, risk tolerance, time horizon, future cash flows, purpose for the investment, etc.? In my view, I would not purchase individual securities in an account this size.
Suplee goes on to say the client always has the ability to discuss the portfolio with the planning professional to gain a better understanding of the basis of the professional's recommendations.
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