No. of Recommendations: 0
Author: PTPFool | Date: 9/20/05 10:21 AM | Number: 47630
My wife is a school teacher, and somehow, through her school, she was introduced to a financial advisor. I just turned 33 years old and she is 25.

This financial advisor has talked her in to opening a ROTH IRA (smart move and something we have meant to do for some time now), but he wants to take 5.75% from each deposit - his fee and his brokers fee (ING Direct)? Once he takes his cut, he is suggesting she use the rest of the proceeds to purchase AMERICAN FUNDS families of mutual funds. They do look to have good performance, and she wants something that she can directly deposit money into each month and not look at or touch. She likes funds because she does not want to spend time researching individual stocks.

She has watched me invest in different FOOL STOCKS (I subscribe to Hidden Gems and Stock Advisor) and she thinks I trade WAY too often. I have definitely cut back on "trading" since getting married to her (and it has served me well), but quite honestly, I find it fun sometimes to buy / sell. I am trading mostly within my IRA, so I understand there are no tax disadvantages - I just have to swallow the service fees... and swallow the fact that I sold Quality Systems WAY TOO SOON..

Anyways - She wants to invest her way, and she wants me to invest my way, and we are going to compare in 15 years. I stand 100% behind her and won't doubt she beats me. However, I can't get over this 5.75% fee. Of every $300 we deposit, she is only buying about $282 worth of the fund. Is this a typical fee? How can she set up a ROTH IRA with direct monthly deposits that is automatically invested in mutual funds of her choice without paying this financial advisor to do nothing more than a bit of paperwork and cheerleading?

I think the fee you are talking about is the 'load', and 5.75% is a typical percentage.

From the American Funds website at:

The American Funds are distributed through financial advisers because we believe that all investors benefit from ongoing professional advice. We recognize, though, that investors have different preferences for paying for that advice. No matter which share class you choose, American Funds' annual expenses are among the lowest for comparable funds, as measured by Lipper Inc.

When you work with your financial adviser to determine which share class to own, please consider: how long you expect to own the shares, your investment objective, how much you plan to invest and the expenses associated with each share class.

Several share class options
We offer two types of share classes, one for our regular mutual funds and another for CollegeAmerica®, our 529 college savings plan:

Class A and 529-A shares are sold with an up-front sales charge, which declines as the investment amount increases. For many shareholders — especially those with significant account balances — these shares are the most cost-effective way to own American Funds.

Class B and 529-B shares have no up-front sales charge but have higher annual expenses than Class A shares. However, if you sell (redeem) shares before you have owned them for six years you will pay a sales charge (maximum 5%) on the shares that you sell. This charge is called a contingent deferred sales charge, or CDSC. Class B and 529-B shares convert to Class A and 529-A shares, respectively, after eight years. This conversion will lower your ongoing annual expenses.

Class C and 529-C shares do not have an up-front sales charge. However, if you sell (redeem) these shares before you hold them for 12 months, you will pay a 1% sales charge on the shares that you sell. This is called a contingent deferred sales charge, or CDSC. In addition, investors pay higher expenses than on Class A and 529-A shares. Class C shares convert to Class F shares after 10 years. Class 529-C shares do not convert.

Class F and 529-F shares are available only through participating financial advisers. Class F and 529-F share purchasers pay an annual asset-based fee charged by their adviser, as well as slightly higher annual expenses than Class A shares.

My guess is that your wife is buying 'A' shares (see my highlighting above).

When some people pay a financial advisor (via a load or otherwise) for advice, they feel much more confident and are much more inclined to save enough for retirement. I would recommend that you just let her go on with her approach for a while and encourage her to learn as much as possible about investing. It is quite possible that she will eventually realize that she can do just as well as the advisor and begin doing it herself.

But, again, the most important thing is saving for retirement. Even though she is paying a 5.75% front load, she can still put a full $4000 per year into her Roth (2005 rate). It will cost more now than investing in a no-load mutual fund, but the end amount of money in the Roth will be the same regardless of the amount it costs to get it there. The time that the load will hurt most is if you can't afford to max out the Roth contributions, because you will not be able to get as much money in.

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