advice on moving from managed funds

[miranda622]

Hi all!

Investing question, with a bit of backstory:

I inherited some stocks in a Merrill Lynch managed fund (taxable account) when my father died, almost a decade ago (in my mid-20s). Since that point, my husband and I have used some of those funds towards buying a house, but the remainder has grown to almost $80K in stocks and $6K in cash (a 160% gain over that period). We've also started our own SEP IRAs through our business and each invested around $26K over the last few years with the same advisor -- those haven't done as well; one's gained around 5% and the other's lost 5%, so breaking even from that perspective.

Anyway, while we are happy to see how well the taxable account has performed, between MMM and John Oliver, we've seen the benefits of index fund-based investing, and are looking into switching -- overall, I think we pay around $1000 per year in management fees, which I know is too high. Also, while the primary account continues to perform well, I do worry about the lack of diversification -- 1 stock represents almost $30K of the portfolio value, so I'm concerned about a major drop if something went south with that company.

In terms of a switch, looking for recommendations re:
- Should we do an in-kind transfer to Vanguard to keep the existing stocks, and just invest the cash portion in mutual funds? This would keep up (hopefully) the great performance of the taxable account, though may still leave us vulnerable if one or more of the investments went south. (We may still switch over the SEPs to index funds in that case, since those haven't performed nearly as well.)
- Or cash out the stocks entirely and make a full switch to index-based funds? If so, we may go for Betterment (where we already have a small taxable account) to make the most of tax-loss harvesting and the automated rebalancing plan, being novice investors (open to learning more, but one step at a time). Doing this, I assume we would need to pay capital gains tax on the taxable plan? Is this also true of the SEPs (though only one has made any profit)?

Possibly we could try a hybrid where we sell off a portion of the shares and keep some -- after examining our portfolio in more detail, I'm just a bit concerned that we're putting all our eggs in just a few baskets, and given that the advisors rarely suggest changes to the portfolio (once every couple years), I think we could probably periodically make changes on our own. I think they've made good choices by and large, but they're used to working with much bigger portfolios than ours, so the risk isn't as spread out as it should be.

Anyway, would love any feedback!

[tj]

What individual stocks are in there? if they are in reliable large comapnies, I'd be inclined to keep them rather than incur a decade of capital gains. My understanding is that Vanguard Brokerage is not so fun to play with, I'd open a brokerage account that will pay you a bonus to bring those individual stock assets:

http://thefinancebuff.com/huge-bonus-offers-from-brokers-fidelity-schwab-td-ameritrade-etrade-merrill-edge.html

[Goldielocks]

Most of my managed funds in the past have been poor performers, or worse, compared with indexing.  But the large company / group pension and retirement funds are often equivalent or higher returns than indexing. 

(A combination of low churn in the account, low low fees, managed, bulk purchasing, etc) Check out to see what you have before making the leap, and triple confirm no fees / penalties for the switch.

[Frankies Girl]

Just for future reference for anyone inheriting...


The best time to avoid the cap gains from selling off funds in an inherited taxable account is within the first year after receiving them (tax sheltered accounts like IRAs won't create taxable events when sold). Holdings in an account such as this (mutual funds/ETFs/whatever) get a stepped up cost (calculated from the date of death if I remember correctly) so you don't get penalized for selling off all those funds your parent had invested in and then held for decades.

I personally would not hold any individual stock/ETF or managed fund again, but that's my preference. I just don't like individual stocks/bonds as there is too much risk associated with poor diversification as you noted. But I'm also a diehard index investor. ;)

OP - at the very least, I'd sit down and check over everything carefully to see what the long term cap gains actually were on each one, and check your taxable bracket, because if you're in the 15% or below, you might be able to start slowly selling off chunks as long as it doesn't pop you up into the 25% bracket.

Get out of active management ASAP - if you are paying a quarterly fee for them to oversee your accounts, then cancel it, or at least make a commitment to figure this stuff out within the next year, and then cancel it. Spend this time researching and get up to speed on how to invest, and what asset allocation you want to hold and how to go about setting up things in order to match up with your AA.

Just a note of how this worked for me: I inherited active "professional" managed accounts when my dad died. I left them in management and did massive amounts of research and about 6 months out, figured out what I wanted to do and felt confident enough to do it. I then informed my financial group I wanted to take everything out of management as I wanted to self-manage, and that required creating new accounts (they had specific number/labeling for professional accounts) and then forced the selloff of several funds that were "professional management exclusives" since they could not be bought or sold by self-managed account holders. So after that was done and all money/funds were shifted to my new accounts, I then sold off the rest of the general mutual funds remaining and invested all of the cash into the asset allocation I had decided on. Now I just take a look at it every year to see if I need to rebalance, but I do just look at it in general once or twice a week just to see what is happening in the market (but you really don't have to pay attention to it more than a few times a year unless you are like me and like seeing what happens in the day to day).

Once you feel more confident and have your game plan worked out, then you move your portfolio if you like to someplace like Vanguard (or Fidelity or one of the other acceptable groups that have a good range of low cost index funds). Likely you will be charged a fee for moving your accounts out of Merrill Lynch, but it's going to be a small price to pay to get over to Vanguard and sometimes they'll rebate the moving fees at Vanguard if you ask nicely. I got paid back by Fido for shifting an account from another place that hit me with a "closing fee" as they were happy to get my money moved over.

But really, you should start doing some basic homework about how to invest and what it would take for you to take over your own investments.

Reading material:

http://jlcollinsnh.com/stock-series/

https://www.bogleheads.org/wiki/Investment_policy_statement
https://www.bogleheads.org/wiki/Asset_allocation
https://www.bogleheads.org/wiki/Lazy_portfolios
https://www.bogleheads.org/wiki/Getting_started

[NoStacheOhio]

Obviously, everyone's situation is different, but the above suggestions are good.

If it were me, I'd do an in-kind transfer to one of the low cost brokerage places (I have Fidelity), then sell of chunks every year to try to avoid getting bumped into a higher bracket, and buy my preferred index fund.

Also, make sure dividends don't get reinvested on funds you no longer want.

[miranda622]

Thanks for the tips, all!

@TJ - they are mostly in large companies - the biggest share is McKesson, which is #5 on Fortune 100 right now - also some in Intel, Microsoft, Agrium, Quest, Corning, Marathon Oil, and Marathon Petroleum. All but Marathon Oil have gained in long term, and I doubt any of them are crazy-volatile at this point. Like I said, that account has done well, so we're hesitant to get rid of the stocks altogether, though would definitely like to lower the management fees and see if there are opportunities to diversify things there. Good to know Vanguard isn't a favorite for brokerage -- it does look like Fidelity has a $300 bonus at our level, so maybe we'll head there instead.

@FrankiesGirl, thanks for the great links! The advisors take a monthly commission (around $90 per month), so it probably is worth making a move sooner rather than later, even if we keep the existing stocks for the time being while we start to learn more about proper asset allocation.

[NoStacheOhio]

Good to know Vanguard isn't a favorite for brokerage -- it does look like Fidelity has a $300 bonus at our level, so maybe we'll head there instead.

I really like Fidelity's website, just stick with their no-transaction-fee index funds (ETF iShares or MF Spartan), and you're good to go.