Author Topic: Index funds vs. active management - goodbye Edward Jones  (Read 3014 times)

hankscorpio84

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Index funds vs. active management - goodbye Edward Jones
« on: April 13, 2016, 11:33:36 PM »
First of all, I would like to thank everyone who contributes on this forum.  Your insights and advice have been very helpful in learning the basics of investing.  I also read a ton of the Bogleheads wiki and mad FIentist posts to convince myself that I am ready to self-manage my retirement accounts.  I realize that this post is preaching to the choir, but I just want to throw this out there for anybody who might be on the fence in a similar situation. 

After discovering MMM in January I have finally made the move to roll an old tIRA and Roth at Edward Jones into my company 401K and a Roth at Vanguard, respectively.  The tIRA was set up by a previous employer, I was talked into the Roth by the EJ adviser.  The tIRA was in an actively managed program called "advisory solutions" that costs 1.36% above and beyond the expense ratios and up front fees of the funds it buys.  Plus a $40 annual account fee.  Plus a $95 fee to liquidate and rollover the account.  Plus fees I am probably unaware of.  You get the picture.

When I first brought up the idea of rolling assets away from EJ the adviser told me a few things that made me chuckle.  First, without asking or knowing anything about my 401k, he said I could not roll a tIRA into a 401k.  Proved that one wrong.  Then he claimed that an actively managed fund will always outperform an index fund over time.  He said buying a front loaded fund (5.75%) will look bad for the first few years, but after 5, then 10 years, it will outperform the index funds.   I brought up the fees and expense ratios - basically saying that moving to low cost index (vanguard) funds is an instant ROI of the difference in expenses.  He then wanted to talk about the new DOL fiduciary standard - claiming that all brokerage firms will soon be subjected to a standard, gov't mandated fee structure. 

It all amounted to the typical hand waving to distract people from the simplest truth - paying for active management is an unnecessary expense.  Just for shits and giggles, I pulled up the accounts in Mint to compare how they've done over the past few months.  Granted, a 3 month window is only a snap shot, and past performance does not guarantee future results, but I would be laughing even harder if it wasn't my money.  The attached screen grab is just a snip of what I was buying with "advisory solutions".  The HSA and Vanguard account circled (and marked green with up arrows next to them LOL)are invested in index funds.  All of the other funds are from the advisory solutions (lots of red down arrows).  The 2 best funds in the EJ portfolio outperformed the index funds by a whopping ~.5% - not even close to covering the 1.36% management fee. 

So now I have the old EJ tIRA in my company 401k, invested in vanguard funds.  The roth is in vanguard.  I can rebalance either account in a matter of minutes from my phone - no need to call the EJ office and exchange pleasantries about kids and dogs and the weather with the criminally pleasant secretary and adviser.  A year ago, the prospect of managing my own retirement accounts would have terrified me, but like most things, common sense, good advice, and a little nudge can go a long way.  Thanks again for all of the knowledge shared on this forum.

MustacheAndaHalf

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Re: Index funds vs. active management - goodbye Edward Jones
« Reply #1 on: April 14, 2016, 12:12:39 AM »
"He said buying a front loaded fund (5.75%) will look bad for the first few years ..."
"He then wanted to talk about the new DOL fiduciary standard - claiming that all brokerage firms will soon be subjected to a standard, gov't mandated fee structure."

Under a fiduciary standard, a front load fund is worse for the client than a no-load fund, and he'd be in trouble.  Unless he means the new front-load fee is 0%, he's got it backwards.  I suspect he won't change when the law passes... but when his firm gets sued repeatedly for violating it, then we'll see change.

On the down side, MMM might get swamped with new traffic under a fiduciary standard - everyone will need to recommend saving costs and prudent investing.  Or maybe people will still not put enough time into investing, but their advisers will work more in their interest.

hankscorpio84

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Re: Index funds vs. active management - goodbye Edward Jones
« Reply #2 on: April 14, 2016, 12:33:55 AM »
To clarify, he insinuated that low expense vanguard funds will be a thing of the past when the standard is fully implemented because brokerages will be forced to provide more guidance to their clients and that the hands off approach that vanguard offers will not be acceptable or financially viable under the new law.  I think he missed the point that vanguard currently offers guidance and management services for lower fees than most brokerages and will continue to do so under the new laws.  He can't seem to fathom a company with a mission, products and services that differ from Edward Jones' philosophy.

As far as the front loaded funds are concerned - he is convinced that it is a better long term choice to buy and hold a front loaded fund than to invest in a passive index fund.  The kool aid is strong, I don't think he will hesitate to manage money the same way under the fiduciary standard.  The problem I see is how do you prove this philosophy is not in the best interest of the client?  Wait 10 years and compare funds?  Maybe I'm missing the point of where there are any teeth to the new fiduciary standard.  Big firms like EJ will do everything in their power to spin the numbers and wave their hands to defend this style of management - it makes them more money!  As long as they sit down with a client and get them to nod their heads and sign the papers I don't see how anything will be different.


VaCPA

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Re: Index funds vs. active management - goodbye Edward Jones
« Reply #3 on: April 14, 2016, 04:56:15 AM »
I'll piggyback on your post and say this forum has been really helpful to me as well when I recently found it. I've always been cognizant of ERs to some extent but didn't realize how much I was still leaving on the table. I'm in the process now of moving some IRAs away from a higher cost provider and into Vanguard.

forummm

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Re: Index funds vs. active management - goodbye Edward Jones
« Reply #4 on: April 14, 2016, 09:20:55 AM »
To clarify, he insinuated that low expense vanguard funds will be a thing of the past when the standard is fully implemented because brokerages will be forced to provide more guidance to their clients and that the hands off approach that vanguard offers will not be acceptable or financially viable under the new law.  I think he missed the point that vanguard currently offers guidance and management services for lower fees than most brokerages and will continue to do so under the new laws.  He can't seem to fathom a company with a mission, products and services that differ from Edward Jones' philosophy.

As far as the front loaded funds are concerned - he is convinced that it is a better long term choice to buy and hold a front loaded fund than to invest in a passive index fund.  The kool aid is strong, I don't think he will hesitate to manage money the same way under the fiduciary standard.  The problem I see is how do you prove this philosophy is not in the best interest of the client?  Wait 10 years and compare funds?  Maybe I'm missing the point of where there are any teeth to the new fiduciary standard.  Big firms like EJ will do everything in their power to spin the numbers and wave their hands to defend this style of management - it makes them more money!  As long as they sit down with a client and get them to nod their heads and sign the papers I don't see how anything will be different.

It's possible he's really dumb and bought the koolaid. It's also possible that he's just continuing to sell you and spew the sales pitch BS he has to spew in order to keep his job.

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Livewell

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Re: Index funds vs. active management - goodbye Edward Jones
« Reply #5 on: April 14, 2016, 09:33:31 AM »
My dad left my brother and I a fund at EJ (nice guy, was a friend of my Dad's) when he passed.  I moved mine to vanguard immediately, the advisor was "puzzled" but didn't put up much of an argument "your Dad said you like to manage your own money"  uh, yah!  Especially when you charge $800 yearly fee PLUS 1% management and VG does 0.05%.   

My brother, two years later, is just figuring this out after he ignored my advice.  Sigh, better late than never.

There are reasons to use financial advisors, I just can't think of any when so much information is readily available on the Internet and a vehicle like Vanguard exists!   Good for you for figuring that out too!