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Should I keep my portfolio with Fidelity or move my funds to a Vanguard target fund in order to preserve principal, maximize return and lower fund advisory fees?

I've rolled over my 401K to Fidelity's Portfolio Advisory Service. My investment allocation is as follows: 14% Domestic Stock; 6% Foreign Stock; 50% Bonds and 30% Short Term. So far, over the past 3 years, the account return is 6.0%. The quarterly advisory fees for my fund are .89%.

Mar 11, 2013 by Peter from Glen Ellyn, IL in  |  Flag
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14 votes

You actually haven't given us enough information to answer your question. How old are you? Are you retired? Are you living off of this account now? Are you married? Does your spouse have additional savings? What is the cost basis and investment strategy of the Vanguard target date fund you are considering? Are you sure you pay 89 basis points per QUARTER?? That's really high!

3 Comments   |  Flag   |  Mar 11, 2013 from San Jose, CA

Hillary, Thanks for your prompt response. I am 72 1/2 and retired and receiving minimum distributions from my account. The basis points per quarter are point 89 annually.

Flag |  Mar 11, 2013 near Glen Ellyn, IL

P.S. I am married and not dependent on this account for my living expenses.

Flag |  Mar 11, 2013 near Glen Ellyn, IL
Hilary Hendershott, MBA, CFP®

Peter, I'm pretty much with Jonathan on this one. Without understanding your goals or needs I really can't answer the question and feel comfortable standing behind my answer. One thing I will say is that your current allocation to US stock is low relative to market capitalization and it seems that you're pretty high in bonds, which is what I assume "short term" means above. I just can't answer your question without understanding what the rest of your investment portfolio looks like. You're already paying close to 1% per year... why aren't you getting good advice for what you're paying? You need a professional to advise you, especially since you are in retirement. Financial mistakes can be irrevocable when you can't earn the money back.

Flag |  Mar 11, 2013 near San Jose, CA

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13 votes

Peter, Your question is a loaded question and it seems like you have already answered it in your own mind.

But I do have a question - what makes you think that you will "preserve principal" with a Vanguard Target Fund? An account's market sensitivity is often determined by the asset classes within the fund. Vanguard's target funds have not done markedly better (or markedly worse) than anyone else's target funds - or diversified portfolios like you already have, for that matter.

However - if your intent is to merely pay lower fees, thus attempting to achieve higher returns - then lower fees do tend to positively affect performance - IN A PASSIVELY MANAGED PORTFOLIO. However, in some cases - and in some specific asset classes, such as international bonds, small cap value, and emerging markets - there is significant evidence that Alpha (excess return) is actually generated by good managers and arguably worth paying higher fees for.

While I have nothing against Vanguard, and we do use some of their offerings in accounts that we manage - GOOD LUCK with creating a relationship with whoever happens to inhabit the cubicle on the day that you call for advice. In particular, should you become disabled or dead... and your heirs need help with the account, especially as it relates to how to roll it over, or should the account remain a beneficiary account, or a spousal IRA (this depends upon your wife's age and the ages of other beneficiaries, by the way)... then the proper advice will be worth thousands of tax dollars either saved or lost. On the other hand... if you are paying advisory fees and getting no ADVICE... well, then you might want to reconsider that relationship too.

Jon Castle http://www.WealthGuards.com

Comment   |  Flag   |  Mar 11, 2013 from Jacksonville, FL

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12 votes

Kudo's to my accomplished colleagues above for their stellar advice. Based on your age, and what I've been able to understand from your above post, I'm still a bit confused as to what your real goal is... is it lower fees, stellar performance, or safety for your assets during these "withdrawal years". These are all different goals... as such, I'd really advise you to seek counsel with a qualified financial professional in your area. While I don't so much mind an "800" number to help me locate parts for my classic cars, I would be very much concerned about gathering financial information from the same. Look for a local "Certified Financial Planner", many of whom work on a fee basis, much as your CPA does.
Based on the current economy, federal printing of currency on a wholesale basis, and historically low interest rates, I would be most concerned about your extemely high allocation in bonds. The market has been "strange" at the very least, to say of late... but, remember, once these historically low interest rates begin to rise, the value of your bond portfolio is subject to decline.
Thus, find a qualified "face" you can deal with locally, one who is experienced, qualified, certified, and who actually cares about YOU to help you make the right decisions.
As an aside, my rate is generally 1% for portfolio management, AND, I primarily use ETF's as well, (many from Vanquard or IShares) so, a little higher than .89, but, then, you (presumedly) get what you pay for...

Rod Miller, CFP, CLU, ChFC

Comment   |  Flag   |  Mar 11, 2013 from Springfield, MO

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8 votes

I have to agree with the comments by Hilary, Rodney, and Jonathan. While I'm a huge Vanguard fan and use many of their funds and ETFs, Jonathan's comment about using one of their financial advisors is right on. While this might seem self-serving the fact is that there is turnover at the advisory units of any of the major fund houses and custodians. Unlike a financial advisor who works with a firm or who is in business for themselves, I would think it is harder to form that same bond with these folks no matter how client-oriented they are. At the end of the day they are salaried employees. As far as using a target date fund at your age I generally don't like TDFs for anyone over say 45. By that point in life and certainly at age 72 you should have a portfolio that is tailored to your goals, risk tolerance, etc. As for whether the 89 basis point fee is reasonable that's tough to say not knowing all of the details of your situation.

Comment   |  Flag   |  Mar 11, 2013 from Arlington Heights, IL

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7 votes


One point that hasn't been addressed is that there's a "fatal flaw" as it applies to Target Date funds in that they will be loading up on bonds, the older you get. Because of your age, this comes at a time when interest rates are at an all-time low and bonds have been in one of the greatest bull markets we've seen. So, making a move like that will simply put you into another scenario where you are going to underperform.

Another thing I implied from your info is that you're seeing the equity markets rocket higher and simply aren't satisfied with your returns. In essence, you have a very low allocation to stocks, so you can't benchmark your returns against equity markets. If; 1. You feel you can take more risk, 2. You're not living off the money and don't think you will need to for the foreseeable futre. Then, perhaps it would be more appropriate for you to adjust to a more balanced portfolio (50% stock funds; 50% fixed income funds). You don't need to move the portfolio to do that.

Comment   |  Flag   |  Mar 12, 2013 from Orlando, FL

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6 votes
David N. Smith Level 10

Peter, It sounds like you are trying to be a penny wise and a pound foolish. Focusing on fees is just one part of managing a portfolio. I do believe that you will be better off with an adviser that understands your goals, objectives, and fears than going it alone and saving the .89% annual fee. Good luck to you.

Comment   |  Flag   |  Mar 12, 2013 from Miami, FL

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5 votes

Peter, the only thing I would want to add, to all the great answers you already received is, I spend 13 years working at Fidelity and very familiar with Portfolio Advisory Services 0.89% annual fee is just a management fee, you are also responsible for expense ratios of the funds you are invested int. I will leave it up to you, to contact your Fidelity Relationship office to find out exactly what it is, but you, possible are underestimating the fees that you are paying. However the advice given by others stands, you need to meet with a fee based financial planner to help you design suitable recommendation and assist you in designing the right portfolio allocation. Sincerely Michael

Comment   |  Flag   |  Sep 24, 2013 from Farmington, CT

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4 votes
Elliott Appel Level 11


For what you are paying now on an annual basis, you should consider searching for a fee-only financial planner, who could give you individualized advice based on your particular circumstances. You could find a planner who works on an hourly basis or one who charges a percentage based on assets under management, like Rodney mentioned. Some people have trouble paying fees, but something to keep in mind is that a good advisor should more than make up for their fees in the advice they give you. An advisor will help keep you on track, manage your investments, help you make Social Security decisions, and other financial decisions that should save you more than 1% annually.

While you have shared a little bit about yourself, it is difficult to evaluate your individual allocation solely on that information. Though target date funds may be tempting offerings, each fund company will have different allocations to stocks and bonds for the particular target date. For example, Vanguard and Fidelity might each have a 2020 target date fund, but Vanguard might allocate 50% to stocks, while Fidelity allocates 60% to stocks. If you decide to go this route, you should take the time to understand the underlying allocations and how that will help you achieve your goals. There are a wide variety of funds available to you as an investor. While ETFs generally have lower expense ratios, expenses aren’t the only factor to consider. While expenses on Dimensional Fund Advisors mutual funds are normally higher than most ETFs, they are an excellent option and have actually outperformed their respective benchmarks in the past, but they are only available through advisors.

Good luck in deciding what to do with your portfolio!

Comment   |  Flag   |  Mar 13, 2013 from Seattle, WA

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