Should I move funds from large bank with high fees even though there will be high gains?
I am extremely dissatisfied with the high fees on my mutual fund investments at a large bank. The investments are easily moved. If I decide to move them, I'm left with about $110k with $29k in capital gains. The expense rates are between .6% and .7%. I hate to leave any of them at this bank. Should I leave them there until some point in the future when I need the money? Or should I sell them, eat the taxes and take advantage of lower fees somewhere else for the next ten to 20 years?
While fees are an important consideration, 0.7% on $139,000 is about $973 per year. Lower your fees to Vanguard's average fee of 0.12% and you will still create a cost of $166 per year. While you could use ETF's to lower the cost even further, you will likely still have some cost to purchase the ETFs. No matter what you do, it will take between 4 - 5 years to breakeven on the tax hit. After that you would be better off with a less expensive investment vehicle. Fees and taxes are the two biggest controllable expenses to investing.
Think about it a second: Your funds have gained $29K on an $81K investment, or about 36%. Assuming you are in the 20% bracket you will owe $5800 in taxes if you sell. (You may also owe state taxes too, if you live in a state with income tax.) $5,800 is 5.3% of your total account. You don't like fees of about 0.7%, so you're willing to pay 5.3% to end the pain? That doesn't make much sense to me. Even the cheapest index funds charge a management fee. So if you save a half-percent per year it will take you more than ten years to make up what you lost to the government by selling. (More, if you pay state income tax.) But only if the performance of what you might buy will equal the performance of what you now own. Ask yourself: How has my account performed, net of fees? You should expect them to be behind their benchmark by 0.7% per year, so if they have done better than that, you fees have bought something worthwhile having.
Is it the investments themselves that you don't like, or the fees the bank is charging to manage those investments? I ask this because if you transfer the account to another investment company but keep the same shares of stocks/bonds/mutual funds/ETFs, there won't be a sell of the shares for gains. You'll just be trading one holding company for another.
Let's say you want to sell all of the investments and start fresh. On $29,000, the normal 15% long term capital gains rate (assuming you are not in the highest income tax brackets) will cost you $4,350. Assuming you save .4%/year on average (you won't be getting investments that charge nothing), that savings is $440/year. It will take you about 9.8 years to make up the capital gains cost with just the lower fees.
Consider ways to slowly move appreciated assets (combining with investment losses, charitable gifting with shares) so that you don't take a huge tax hit all at once. Also, look at the funds in context of more than just fees. A managed large cap stock fund expense ratio is around .6%. Index funds are less, but overall your bank may be in line with averages for the industry.
Unless fees are egregious and inappropriately structured, without any alignment of interest- you must consider fees in aggregate i.e. evaluate the performance net of fees and taxes. Often, people's dissatisfaction of fees is because of some other reason such as performance or service. So, I suspect your strong words against the bank has some other reason- so evaluate that reason well to see if it is a strong enough reason to leave despite the tax consequence. For example, if you are uncomfortable about the people at the bank or the ones running the fund and suspect their integrity then that is a good reason to take your money and run!
Just based on the fees, I do not think it makes sense to pay taxes on your capital gains to save a few basis points (100 basis points are equal to 1%) of fees. One of the things you can do especially if you are in a lower income tax level is to sell your investments in parts and transfer it elsewhere to reduce the tax effect. Capital gains for overall income in the lower tax brackets are taxed at as low as 0%.