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?
Good question, and there are some great answers on here already. I would also suggest going to www.morningstar.com, type in the ticker in the Quote search bar, bring up the mutual fund, and click on the Expense tab. This tab provides some great information that includes comparing the expense ratio to its peers, but also a couple of other important factors. Check under the sales fees, and see if you have a deferred or redemption cost. Some funds may have a lower internal cost, but charge you to sell positions. Deferred costs go away after a period of time (often 90 days, but could be longer). Redemption fees will likely be charged when you sell the fund. Also look under the Other Fees/Expenses section. There is a line item called 12b-1 Actual, and this refers to fees going back to your advisor. It's a charge you don't see leave your account, but is paid as a commission trail out of your assets regardless.
I like the suggestion from a previous answer, where it was suggested you move the positions to a discount broker like Fidelity, Schwab or TD Ameritrade. They should be able to transfer the positions in kind, which means you wouldn't have to sell the positions and realize the tax liability. Then you can sell positions over time and spread out the impact to you. While we place a great emphasis on fees, it is more important to know whether the objective of the portfolio matches your objective and your risk tolerance. Some active managers can provide good value in helping control portfolio risk, but many U.S. equities are highly efficient already, and you will find limited value in active managers in domestic large cap or domestic mid cap funds. Often you're better in an ETF, but beware some ETFs are expensive as well. Look up their expense ratios in Morningstar as well.
Good luck to you!
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.
I am not certain that rates of 2/3 of a percent are high if the funds are active, providing alpha and appropriate for you. You could move the funds to another place if you dislike the bank or the advisor; you could add new money into lower cost options such as ETF that mimics the S&P 500 which is likely available at 5 basis points. I think that what you really need to do is decide what is a fair price to pay. The tax on the cap gains will be hard to swallow and recoup, but you have to look at your overall portfolio and determine how long the break-even period is.
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.
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.