Q: What are the mechanics of changing to a discount brokerage firm? Who are some of the major discount players besides Fidelity?
My IRA is handled by an investment firm in Austin. Recently, they advised me that their management fee was going to 1.35 percent. The amount didn't register with me until I got a couple of prospectuses on my holdings in John Hancock Investments. In one of those funds, John Hancock charges total 0.90 percent. In another, the charges total 1.46 percent. This is on top of the 1.35 percent management fee the Austin firm charges.
I asked my account management team’s spokesperson if there was a lower-cost alternative such as a self-directed IRA. The answer: I was already in a self-directed IRA and I was in their lowest-cost situation. He went on to say that “at the end of the day, a 1.35 percent fee is tax-deductible.” (I do not itemize.) He also said [it] “isn't going to materially affect the portfolio in the grand scheme.” I say it has and will continue to! —R.B., San Antonio, Texas
A: It’s convenient for your account representative to believe that his fee won’t “materially affect the portfolio,” but there is no evidence to support his belief. Let’s examine the realities here. Your mutual funds have expense ratios of 0.9 percent to 1.46 percent. Let’s call it an average of 1.18 percent. You pay an extra 1.35 percent fee for your firm’s oversight and accumulated wisdom, a wisdom that doesn’t appear to include statistical analysis or probability. Your total cost is about 2.53 percent.
Their system appears to work nicely for them. They get to collect 2.53 percent annually from your savings. They do this in a market where a 10-year Treasury yields only 2.56 percent and the S&P 500 yields only 1.78 percent. Basically, they get all the income your savings can generate. They do this with no risk to themselves. They have left all the risk to you, lucky fella.
That kind of deal fits pretty well in the “nice work if you can get it” category. So I suggest that you introduce your witless spokesperson to account-loss risk.
The mechanics of changing from one institution to another are simple. Call or visit an office of the firm you wish to move to. Arrange for a direct transfer of your account and assets. Fidelity and Schwab both have experts in the mechanics of transfers. They will help you make the change smoothly.
I mention Fidelity and Schwab frequently because these two firms have more brick-and-mortar offices than any other discount firm. Most people still prefer a face-to-face contact for transactions as large and important as investment and retirement account moves.
If you feel comfortable with phone call transfers, you will find that Vanguard provides the widest range of low-cost, tax-efficient fund sources.
But let’s keep a sense of proportion about this. You can easily manage your money at Fidelity or Schwab using exchange-traded funds. Your average cost for a diversified portfolio will probably run less than 0.20 percent, if you stick with ETFs.
It will be nearly 13 years in your new account before you pay out the amount you pay to your current manager in one year.
Q: I am having a difficult time finding any advantage to refinancing my home mortgage. I cannot justify the closing-cost expense.
The mortgage lenders use the following rationale, which I believe shows they have only one objective in mind — make the sale: “I’m not sure why you wouldn’t want to refinance, as you’d be saving about $1,776 a year in interest (that’s on 30 years) and saving $431.18 per month in payment. If you add $432 back to your principal payment with a new loan, you can pay that off in 147 months or 12.25 years.”
Currently, I spend an extra $200 on my mortgage payment. — D.W., Portland, Oregon
A: It’s difficult to do a true apples-to-apples comparison when you are taking on a new 30-year mortgage to replace an existing mortgage that now has a shorter term. The most common way to make the decision is to consider it on a “payback” basis: how many years it will take before you recover your out-of-pocket costs for the refinance. If the payback is short, it's a good investment.
Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc., a registered investment adviser. His e-mail address is scott@scottburns.com
