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|Subject: Re: Loaded Funds, IRA||Date: 3/4/2011 9:20 AM|
|Author: HELJinCT||Number: 68611 of 77130|
So, I want to give an update on this situation.
For starters, the market tanked right after my check was cut from my previous 401k account. It is recovering now, but I am still in the black in terms of not having immediately done anything with my money. This has been comforting and has allowed me to make analyze a little bit.
I have spoken with someone at Vanguard. They were very kind, but also very straight-forward. They simple said yes I can move my money there and described the fees. Although I gave them bait a few times to trash my alternative options, they simply had nothing to say to coax me. This is good and bad. The good is that they probably feel their product speaks for itself. The bad is that people who need guidance, like myself, aren't going to get it from a Vanguard. We're entirely on our own (or so it seems).
I also had a sit down meeting with the Merrill advisor. Turns out he also advises several other senior technologists that work in my current firm (this guy gets around, it seems). I asked him some frank questions.
I said "If you take an arbitrary annual return number, like 7%, and then you throw a number like 3% down for inflation, that only leaves 4% per year of actual gain. Of that 4%, if Merrill is taking half of it, is this not crazy?". I also asked him to explain why there would be an advantage in going with Merrill over no-load low fee index funds.
His response was something like this.
1. All mutual funds have fees. Even the Vanguard index funds. Index funds are merely lower because they simply follow an index.
2. He went on to explain A shares, B shares, C shares, and I shares. His initial suggestion for me was C shares (A and B shares appear to be paying more commission on purchase/sale, which would also make it more expensive to change strategies?). With the C share model, there is a 1% 12b-1 fee on top of the funds normal expense ratio. With an I share model, you are paying a flat 1% for "MLPA", which is a full time Merril Lynch personal advisor. In that scenario, you pay no 12b-1 fee. Either way, Merrill is getting 1%. With the "I shares", supposedly you can just purchase smaller share quantities without paying fees.
3. He seemed to be pretty carefree about the idea of me moving my money to another provider. i.e. it was my money, and he was essentially only here if I really wanted someone to help me manage my money, rebalance my accounts based on markets and future predictions, etc. In other words, if I didn't have time to be a full time market watcher, that's what he does.
4. He explained that 60% of the funds he was putting me into were actively managed by proven PMs. The idea wasn't so much to beat the indexes when the market was going well, but to know when to move money to cash when black swan events occur. Minimizing damage. I understand what he is saying, but on the same token, don't PM's miss the upswings as well because they are always hedging somewhat?
Finally, I can't seem to get an apples to apples comparison on my own. I'd love to see some proof about how Vanguard funds over 30 years with much lower fees (0.25%?) and someone inexperienced like me managing allocation would stack up to an advisor-managed account with a 1% advisor fee and 0.75% fund mgmt fees. Obviously if the performance is identical it's easy, but is it?
I looked at the Vanguard 2040 Target Retirement fund. 3 year returns are actually negative, although the 1 year return is 15%. The fund has only been around for 3-4 years so there is no data beyond that.
The 2035 retirement fund has a 3.5% return over 5 years, which sounds pretty abysmal. Since inception in 2003, it has returned 6 percent over almost 7 years.
If I look at the history of most of the funds the ML advisor suggested for me, they seem to perform far better than that.
You guys and gals are all way ahead of me on this stuff though, so I presume I am really missing something.
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