When moving your IRA to a different fund, are there other factors to consider besides the rate of return?
The original IRA fund that I opened has been sold to several different funds, and I do not feel comfortable with them. The bank sent me another option, but it costs twice what I was paying before, has a double expense ratio and a stock turn of 29%. I have to make a decision soon. I'm guessing that when I talk to the broker from the bank he will tell me the only thing to consider is the rate of return. Should I consider other factors besides the return? This is my sixth IRA fund. I opened it in case of emergencies, but I don't need access to the funds now. Later it will go to my estate.
Yes, risks! It is not about absolute returns but risk-adjusted returns. In other words, how much risks did you take to achieve those returns? I would suggest speaking to a fee based only advisor who acts as your Fiduciary, not a broker. This way you can be more assured you''re getting the best value and management for a particular fund(s). Most funds have many different classes and a broker is likely to put you in the "same" fund but with higher fees so that their payout is higher.
I do have a few other questions. Are you saying you have six IRAs, or this is the sixth fund in the same IRA? If the former, why do you have so many IRAs in various places? This makes it harder to manage your overall portfolio and can increase transactions.
Second, and more importantly, why leave it to your estate? This will cause a lump sum taxable event. You want to leave it directly to the heir(s) you intend to receive the monies so that they have the option of rolling it into either a regular IRA if your spouse or beneficiary IRA if non-spouse. This way it can continue to grow tax deferred less the minimum required distributions (MRDs), and is asset protected from their creditors. If they are a minor or a spendthrift, you can always set up a "look through" trust to hold the assets without it being considered a taxable distribution. Again, a second opinion from someone well versed in estate, retirement, and investment management is probably a good idea.
Hope this helps and best of luck, Dan Stewart CFA®
There are a bunch of other things to consider. I would argue that your long term, future return, net of fees and expenses (in an asset allocation or fund that alligns with your goals and risk tolerance of course) is the most important thing. However, if an advisor points to a historical return, that can be extremely misleading when looking at a fund. You have to understand how the fund achieved the return it did - there is something called an "attribution report" that wil show this for various investments. For example, maybe a fund outperformed its category (say for example large cap value) because the fund invested in a lot of large cap growth, which has done better recently. It's not that it is actually outperforming, it's just that it didn't stay true to its investment principles or took on more or a different risk than someone wanted. If you are looking to invest in a fund, I would look at the long term management track record over long periods of time (if you can take a look at rolling periods of time this is even better.) This will give you a better idea of the process the fund manager took to achieve whatever returns they did. Short term perforamnce can be especially misleading. If the funds haven't been around a long time then it is harder to evaluate. This is of course referring to "active" mutual funds and investments. If you utilize a passive strategy (index mutual funds or ETFs) then you want to look at the size of the fund and how low the expenses are and it's tracking error (meaning it shouldn't be under or overperforming its index, but matching it.) Of course look at commissions you are being charged or trading fees (most banks have pretty high fees.) My advice to you would be to either 1) find a good advisor you like and trust and consolidate all your IRAs and investments with them or 2) go to Vanguard and invest directly in passive funds. Warren Buffet said that his money is all to be invested in an S&P 500 index fund after he dies because he doesn't think most people can outperform. Nothing wrong with paying a fee or commission to an advisor IF they are giving you great service, advice, and you have a great relationship with them. If you don't get great feelings, find someone who will care about you since they are specifically gettting paid to service you. Good luck!
Great question. There of course are other factors to consider besides the return. This depends on the type of investor you are. If you are someone to attempts to "beat the market each year" then it would make ficsal sense to pay higher fees for a potentially higher return. I myself do not believe in beating the market, as I focus on an indexing philosophy. With indexing, you attempt to match the market, or your level of risk, for the lowest internal fee possible. So, over a 10 year period, the account should have matched the performance of the S&P 500 almost identically, with an internal fee of 0.05%-0.10%. Meaning over a 10 year period, your portfolio would have trailed the S&P 500 be only 0.50% to 1.0% (The internal, annual fee times 10).
If you attempted to "beat the market" each year for a 10 year period with a popular mutual fund, on average the fund would have beat the market 3 times, matched the market 4 times, and underperformed the market 3 times.This "law" of economics is called reversion to the mean, as it is nearly impossible to consistently beat the market. The average annual internal fund fee ranges from 1.2% to 1.6%; the mutual fund would have had to outperform the S&P 500 by 12% to 16% just to break even! In the history of mutual funds, there have been a very small handfull fund managers who consistantly outperformed the market for several years in a row, making it a very uncommon practice.
Ultimately, the decision is yours on how you want to invest your retirement, but make sure you are aware of what you are paying, as underperformance with the addition of high fees only compounds your losses.
David Michael Howard
Independent Financial Advisor