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Q&A: Investing

Ask the right questions to find the right answers.

Question: I have about $250,000 in retirement savings from a previous job. I’m considering moving the money into a brokerage account, where I could buy a bunch of funds from one fund family to keep the load low, with low expense ratios, and rebalance them on a quarterly basis to maintain the right asset allocation. Or I could just put the funds into a managed account, where the expenses would be based on a certain percentage of assets on hand. In 20 years, wouldn’t I be better off with the first option?

Ric: It’s good that you’re asking that question before acting. The short answer is that you won’t necessarily be better off in 20 years because you’re limiting yourself to only two choices when, in fact, a third one is available.

The first choice you cited is investing in a mutual fund family that is called a load family — meaning it will have an up-front sales charge in addition to annual expenses. The second choice you mentioned is putting the money into a managed account, which will, of course, charge you for that service.

The third option is that you could choose a series of no-load funds, in which case you wouldn’t have to worry about any up-front commission — called a sales charge or front-end load.

The only reason people sometimes say “I should put all my money in one single fund family” is that they’re trying to get a “break point” — a volume discount. Typically, the more you invest in a single fund family, the lower the front-end load.

But why pay a load at all? I don’t understand why anybody in today’s investing environment would choose a load-fund organization, because whether you’re getting a discount or not, you’re still paying the load when so many no-load alternatives are available.

Also, the only way to get the lower load from a load-fund family is to put all your money into that family’s funds. But no fund family has the best funds in every category because of the many different asset classes — stocks, bonds, government securities, real estate, natural resources, precious metals, energy, foreign securities — the list goes on and on. Every fund family offers stock and bond funds in all these classes, but none has the best funds in every category.

So although you could reduce your frontend load by staying in one fund family, you could be stuck with subpar choices — they could be riskier, more expensive or lower in performance than alternatives. You could avoid that dilemma if you simply said, “I’m going with no-load funds, and now I can use as many different fund families as I want because none of them will charge me a load.”

Now compare that to the managed account idea. We’re talking apples and oranges here, because in a managed account you’ve got an emphasis on the word managed. If you buy funds from an advisor offering a managed account, you should get a wide variety of financial planning services beyond just the investments themselves.

That’s why I believe that you should choose the managed account, through an independent, fee-based advisor who provides you with advice for all your personal finance needs, not just your investments but also insurance, taxes, mortgages and home ownership, employee benefits, Social Security, college planning, estate planning, retirement planning and more. This is the approach we provide our clients, and we believe it’s the best approach available. I would encourage you to consider this and compare it to your “load up on load funds” idea before you make a decision.

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