American Funds Roth IRA - did I make a mistake?

[unmetamorphosed]

I've been a lurker on the MMM website for a while but I'm just now venturing into the forums for some advice. I was unsure of whether this belongs here or in the Investor Alley section, apologies if so!

I'm turning 23 in 2 months. Zero debt (no student loan debt and I completely own my car). I have a budget figured out and am working towards accumulating my 'stache, so I didn't think a detailed case study posting was warranted for this question, although I may make one later.

The Issue:
This year I wanted to start a Roth IRA so in February my dad set me up with his financial advisors (who've also advised my family for the last 20+ years). Of course they recommended an American Funds Roth IRA.

Prior to meeting with them I had actually read enough of the MMM website to know that Vanguard's index funds had low expense ratios and did well in the long term but not enough to go into detail and actually hold a proper conversation with a financial advisor. When I recited what I knew about Vanguard they just fed me a bunch of graphs and big words and I crumbled and went with American Funds. I contributed $5500 for 2014 and have auto withdrawals set up to hit the max again for 2015. Currently I have a little under $10,000 in my portfolio. From my online account summary:

American Funds Growth Portfolio (GWPAX)

Underlying Funds:
Growth 70%
AMCAP Fund 30%
EuroPacific Growth Fund 25%
SMALLCAP World Fund 15%
Growth & Income 30%
Fundamental Investors 30%

Asset Mix:
U.S. Equities 57.7%, Non-US. Equities 33.9%
U.S. Bonds .2%, Non-U.S. Bonds 0%
Cash & Equivalents 8.2%

Fees:
Annual Management Fees .10%, Other Expenses .13%, Service 12b-1 .19%
5.75% Class A front load
Gross Expense Ratio: .85%

Question:
Would it be better to transfer this to some type of Vanguard fund (I'm thinking either Target Retirement 2055 or 2060 Funds?), or should I just keep the actively managed American Funds and start putting additional future savings into a new VTSMX fund? I have the ability to put save a bit more on top of maxing out my IRA each year, so I'd also like to start some type of additional index fund soon, regardless.

From what I've read American Funds isn't the worst I could have done, but now that I better understand how low cost index funds are in the long term I'm kind of horrified by how much I'd lose to fees with an actively managed fund....

I'm definitely planning on reading a few of the recommended books and educating myself further but I just want to seize the opportunity to fix this (if it needs fixing) while it's just starting out. Any clarity is appreciated ~ thank you!

[Cwadda]

Fees:
Annual Management Fees .10%, Other Expenses .13%, Service 12b-1 .19%
5.75% Class A front load
Gross Expense Ratio: .85%

There's your answer right there!

I was actually in the same exact boat. A few years ago I had an account with American Funds and paid a lottt of fees. I made the switch the Vanguard and now I feel a lot better about it. I would recommend just biting the bullet and transferring the stuff over. You'll have a clear conscious afterward.

[Frankies Girl]

Get out ASAP and move your money over to Vanguard.

These American Funds are front loaded (so you lost a big chunk right at the start before even getting into the market for the adviser's kickback and AF's fee), then they have a really high expense ratio and included in that fee is a 12b-1 fee - which is strictly for marketing, as in "hey, recommend this fund to your suckers clients, and we'll pay you even more! Let us wine and dine you so you'll want to sell our crappy fund!"

Get away from these advisers and get out of those funds. They'll likely hit you with a transfer or closing fee to leave, but it's a small price to pay to get away from them now. It's unfortunate that they've skimmed off some of your money that you'll not get back, but don't stay there just because of that; see the "sunk cost fallacy" and just move on as soon as you can.

I kind of think of financial advisers as the equivalent of used car salesmen - they're not doing anything illegal, but they'll do everything possible (including lie if they can get away with it) to get you to give them as much money as possible. Some people never realize how much they overpaid for a car or how crappy the car is until a little while later when the car blows up at a stoplight... but if you do your homework and simplify how to invest (index fund is the easiest way to invest well and not get taken advantage of) then you never have to deal with these types again.


http://jlcollinsnh.com/2012/06/06/why-i-dont-like-investment-advisors/
^great explanation

http://jlcollinsnh.com/stock-series/
^read the rest of Jim Collins' series to as it is solid gold

http://jlcollinsnh.com/2011/06/08/how-i-failed-my-daughter-and-a-simple-path-to-wealth/
^what you probably should be doing (his advice to his college age daughter)

[forummm]

American Funds Roth IRA - did I make a mistake?

Yes. Get out now before it costs you more serious money.

[kpd905]

Get out now.  And try to convince your dad that his financial adviser has probably been screwing him over this whole time.

You contributed $5500 and immediately lost $316 to the crazy front load fee.  This probably all went to your adviser.

[seattlecyclone]

Yes, it is a mistake. Good thing you caught it after only contributing $10k! Fire the salesman and switch to Vanguard. Don't let them fool you with graphs. If they offer any resistance to your moving your money, initiate the rollover from Vanguard's website; they can take care of the transfer.

[frugalnacho]

Ditto what everyone else said.  Immediately stop your on going contributions, you don't want to get dinged for that 5.75% up front fee again!  That fee on the money you already put in is a sunk cost, you can't get it back.

Fire that crook asap.  Or better yet just set up an account at vanguard, and let vanguard fire him and move the account over.  You won't ever have to talk to him again.

[unmetamorphosed]

Thanks everyone! I figured as much, I just wanted some reassurance since I'm so new to all of this...this morning I went through the quarterly reports I've been receiving and added up all the money I've already lost to fees since this began: $590.14. Additionally, I would further be losing $6.36 each contribution this year! Trying not to hulk smash my computer and instead I'm just compiling a bunch of information I can take when I have a fun little chat with my advisor, which will be very soon.

I'm also taking a page from MMM's book. In the same way he learned from his Big Mistake, this was a learning experience that's motivated me to educate myself further and I'm just grateful I caught it so early.

It is meant to be an example of how even bad situations can turn good, how pain leads to happiness, and how expensive lessons can still lead to riches. - Mr Money Mustache's Big Mistake

[unmetamorphosed]

Get out now.  And try to convince your dad that his financial adviser has probably been screwing him over this whole time.

You contributed $5500 and immediately lost $316 to the crazy front load fee.  This probably all went to your adviser.

Yeah, I have my the information for some accounts my dad has had through them for me (a 529 and a trust) for almost a decade. I'm going to run numbers on those comparing then to Vanguard equivalents and show them to him. He's the type to want someone else to manage his money for him but he still won't be pleased with what I'll have to show him.

[Cwadda]

Thanks everyone! I figured as much, I just wanted some reassurance since I'm so new to all of this...this morning I went through the quarterly reports I've been receiving and added up all the money I've already lost to fees since this began: $590.14. Additionally, I would further be losing $6.36 each contribution this year! Trying not to hulk smash my computer and instead I'm just compiling a bunch of information I can take when I have a fun little chat with my advisor, which will be very soon.

I'm also taking a page from MMM's book. In the same way he learned from his Big Mistake, this was a learning experience that's motivated me to educate myself further and I'm just grateful I caught it so early.

It is meant to be an example of how even bad situations can turn good, how pain leads to happiness, and how expensive lessons can still lead to riches. - Mr Money Mustache's Big Mistake

If it makes you feel any better, I contributed $6000 to AF a while ago and ended up eating it and switching. Do it now, learn from the situation, move on, and don't look back.

A Roth with Vanguard is very easy to do. The Roth account itself takes only a few minutes to set up. The rollover will be taken care of by Vanguard for you, and takes about 2-3 weeks all said and done. This is not a taxable event.

[unmetamorphosed]

Thanks everyone! I figured as much, I just wanted some reassurance since I'm so new to all of this...this morning I went through the quarterly reports I've been receiving and added up all the money I've already lost to fees since this began: $590.14. Additionally, I would further be losing $6.36 each contribution this year! Trying not to hulk smash my computer and instead I'm just compiling a bunch of information I can take when I have a fun little chat with my advisor, which will be very soon.

I'm also taking a page from MMM's book. In the same way he learned from his Big Mistake, this was a learning experience that's motivated me to educate myself further and I'm just grateful I caught it so early.

It is meant to be an example of how even bad situations can turn good, how pain leads to happiness, and how expensive lessons can still lead to riches. - Mr Money Mustache's Big Mistake

If it makes you feel any better, I contributed $6000 to AF a while ago and ended up eating it and switching. Do it now, learn from the situation, move on, and don't look back.

A Roth with Vanguard is very easy to do. The Roth account itself takes only a few minutes to set up. The rollover will be taken care of by Vanguard for you, and takes about 2-3 weeks all said and done. This is not a taxable event.

Exactly. Learning experience! Emailing my advisor to set up an appointment right now. The only reason I'm doing that is because they've known my family for 20+ years and I don't want to aggravate my dad by leaving on less than 'friendly' terms.

[zephyr911]

5.75% front load?
I didn't realize funds still existed with that kind of raping up front. They've declined substantially as people start to realize how much it eats into long-term returns.
I'm sure you've figured this out, but that load fee represents a cut of not just your contribution but all future returns. Say you invested enough today to have $1M at age 60 (just notional). You'd lose $57,500 off the final total, leaving you with $942,500.
I'll let you decide if this company is going to do enough work with your money to earn nearly 60 grand of it (just kidding, of course they aren't).

[unmetamorphosed]

5.75% front load?
I didn't realize funds still existed with that kind of raping up front. They've declined substantially as people start to realize how much it eats into long-term returns.
I'm sure you've figured this out, but that load fee represents a cut of not just your contribution but all future returns. Say you invested enough today to have $1M at age 60 (just notional). You'd lose $57,500 off the final total, leaving you with $942,500.
I'll let you decide if this company is going to do enough work with your money to earn nearly 60 grand of it (just kidding, of course they aren't).

Yeah, I realized that. Absolutely outrageous.

[unmetamorphosed]

Thanks everyone! I figured as much, I just wanted some reassurance since I'm so new to all of this...this morning I went through the quarterly reports I've been receiving and added up all the money I've already lost to fees since this began: $590.14. Additionally, I would further be losing $6.36 each contribution this year! Trying not to hulk smash my computer and instead I'm just compiling a bunch of information I can take when I have a fun little chat with my advisor, which will be very soon.

I'm also taking a page from MMM's book. In the same way he learned from his Big Mistake, this was a learning experience that's motivated me to educate myself further and I'm just grateful I caught it so early.

It is meant to be an example of how even bad situations can turn good, how pain leads to happiness, and how expensive lessons can still lead to riches. - Mr Money Mustache's Big Mistake

If it makes you feel any better, I contributed $6000 to AF a while ago and ended up eating it and switching. Do it now, learn from the situation, move on, and don't look back.

A Roth with Vanguard is very easy to do. The Roth account itself takes only a few minutes to set up. The rollover will be taken care of by Vanguard for you, and takes about 2-3 weeks all said and done. This is not a taxable event.

Quick question, when you transferred your existing Roth to Vanguard, did you select the option to liquidate your AF account and buy new Vanguard mutual funds, or the other option to transfer in-kind? Is one option preferable over the other, or what's the difference between the two?

I should probably end up calling Vanguard so I don't make some kind of mistake.

[frugalnacho]

Thanks everyone! I figured as much, I just wanted some reassurance since I'm so new to all of this...this morning I went through the quarterly reports I've been receiving and added up all the money I've already lost to fees since this began: $590.14. Additionally, I would further be losing $6.36 each contribution this year! Trying not to hulk smash my computer and instead I'm just compiling a bunch of information I can take when I have a fun little chat with my advisor, which will be very soon.

I'm also taking a page from MMM's book. In the same way he learned from his Big Mistake, this was a learning experience that's motivated me to educate myself further and I'm just grateful I caught it so early.

It is meant to be an example of how even bad situations can turn good, how pain leads to happiness, and how expensive lessons can still lead to riches. - Mr Money Mustache's Big Mistake

If it makes you feel any better, I contributed $6000 to AF a while ago and ended up eating it and switching. Do it now, learn from the situation, move on, and don't look back.

A Roth with Vanguard is very easy to do. The Roth account itself takes only a few minutes to set up. The rollover will be taken care of by Vanguard for you, and takes about 2-3 weeks all said and done. This is not a taxable event.

Quick question, when you transferred your existing Roth to Vanguard, did you select the option to liquidate your AF account and buy new Vanguard mutual funds, or the other option to transfer in-kind? Is one option preferable over the other, or what's the difference between the two?

I should probably end up calling Vanguard so I don't make some kind of mistake.

In kind just means they transfer it over.  Like if I bought $100 worth of stock in a taxable account, and it went to $200, then I did an in-kind transfer to vanguard, they would just transfer the shares over to vanguard without triggering a taxable sale of the assets.  If you liquidate the fund and repurchase it triggers a taxable sale and I would realize $100 worth of capital gains.  If you are dealing with a tax advantaged account (401k, IRA, roth IRA) it doesn't matter because it's tax sheltered.  You can sell and trade all you want and it won't trigger any tax. 

Yes, definitely call vanguard so you don't make a mistake.  You are going to have to call them anyway.  Just tell them what you want and they will take care of you.

[Vertical Mode]

I've been a lurker on the MMM website for a while but I'm just now venturing into the forums for some advice. I was unsure of whether this belongs here or in the Investor Alley section, apologies if so!

I'm turning 23 in 2 months. Zero debt (no student loan debt and I completely own my car). I have a budget figured out and am working towards accumulating my 'stache, so I didn't think a detailed case study posting was warranted for this question, although I may make one later.

The Issue:
This year I wanted to start a Roth IRA so in February my dad set me up with his financial advisors (who've also advised my family for the last 20+ years). Of course they recommended an American Funds Roth IRA.

Prior to meeting with them I had actually read enough of the MMM website to know that Vanguard's index funds had low expense ratios and did well in the long term but not enough to go into detail and actually hold a proper conversation with a financial advisor. When I recited what I knew about Vanguard they just fed me a bunch of graphs and big words and I crumbled and went with American Funds. I contributed $5500 for 2014 and have auto withdrawals set up to hit the max again for 2015. Currently I have a little under $10,000 in my portfolio. From my online account summary:

American Funds Growth Portfolio (GWPAX)

Underlying Funds:
Growth 70%
AMCAP Fund 30%
EuroPacific Growth Fund 25%
SMALLCAP World Fund 15%
Growth & Income 30%
Fundamental Investors 30%

Asset Mix:
U.S. Equities 57.7%, Non-US. Equities 33.9%
U.S. Bonds .2%, Non-U.S. Bonds 0%
Cash & Equivalents 8.2%

Fees:
Annual Management Fees .10%, Other Expenses .13%, Service 12b-1 .19%
5.75% Class A front load
Gross Expense Ratio: .85%

Question:
Would it be better to transfer this to some type of Vanguard fund (I'm thinking either Target Retirement 2055 or 2060 Funds?), or should I just keep the actively managed American Funds and start putting additional future savings into a new VTSMX fund? I have the ability to put save a bit more on top of maxing out my IRA each year, so I'd also like to start some type of additional index fund soon, regardless.

From what I've read American Funds isn't the worst I could have done, but now that I better understand how low cost index funds are in the long term I'm kind of horrified by how much I'd lose to fees with an actively managed fund....

I'm definitely planning on reading a few of the recommended books and educating myself further but I just want to seize the opportunity to fix this (if it needs fixing) while it's just starting out. Any clarity is appreciated ~ thank you!

Starting a Roth IRA and investing in it could hardly be considered a mistake :-) Kudos for getting serious about it so early.

Investing with those terms IS a mistake, though. A 5.75% front load should be criminal, AND an expense ratio higher that is higher than it needs to be. I suggest you follow others' advice and put American Funds in your rearview.

Vanguard is well-known for great low-fee investing opportunities (I use them myself and I recommend them), but I think Fidelity and Schwab have started offering some similar products, too. If you're inclined to "set it and forget it", a Vanguard Target Fund could be a pretty defensible choice.

[unmetamorphosed]

In kind just means they transfer it over.  Like if I bought $100 worth of stock in a taxable account, and it went to $200, then I did an in-kind transfer to vanguard, they would just transfer the shares over to vanguard without triggering a taxable sale of the assets.  If you liquidate the fund and repurchase it triggers a taxable sale and I would realize $100 worth of capital gains.  If you are dealing with a tax advantaged account (401k, IRA, roth IRA) it doesn't matter because it's tax sheltered.  You can sell and trade all you want and it won't trigger any tax. 

Yes, definitely call vanguard so you don't make a mistake.  You are going to have to call them anyway.  Just tell them what you want and they will take care of you.

Thanks for the explanation! Since both options are worry-free tax-wise I guess when I call I'll ask if its better to liquidate my assets and buy Vanguard shares or just keep what I currently have, if that even makes a difference.

[unmetamorphosed]

Starting a Roth IRA and investing in it could hardly be considered a mistake :-) Kudos for getting serious about it so early.

Investing with those terms IS a mistake, though. A 5.75% front load should be criminal, AND an expense ratio higher that is higher than it needs to be. I suggest you follow others' advice and put American Funds in your rearview.

Vanguard is well-known for great low-fee investing opportunities (I use them myself and I recommend them), but I think Fidelity and Schwab have started offering some similar products, too. If you're inclined to "set it and forget it", a Vanguard Target Fund could be a pretty defensible choice.

Thanks! Yep, ditching AF. Since Vanguard is great for newbie investors like me I'm going with one of their Target Retirement Funds. I like that it's automatic but I can still adjust asset allocation myself if I want more or less risk. After I educate myself further I'll also look into Fidelity and Schwab when I begin other investments.