Q. We are paying 2.2 percent in fees to Merrill Lynch. I don't think I can tolerate that. We have some Merrill Lynch investments, so if we move our money to another firm, say at .9 percent or 1 percent, will we have to sell the Merrill Lynch properties and pay taxes on that? They are in an IRA worth about $340,000.
Will a move benefit us? We are not buying or selling that much anymore, so do we need an "advisor"? We are 72 and 74 years old. We sell only what we are required to sell by the IRS. —A.B., by email
A. Since the money appears to be in a tax-deferred account, you could sell anything that needed to be sold without tax consequences— unless you take the proceeds out of the account. You could also transfer all non-proprietary investments— such as individual stocks and bonds, many mutual funds and all exchange traded funds—to your new custodian and sell them at your leisure and at your new brokerage commission rate.
Where most people run into expenses when they move from a major brokerage house like Merrill is in the required sale of proprietary securities such as unit trusts. In those, the broker generally controls the transaction costs, so the sale is likely to cost more than you expect because the brokerage firm bid will be less than you’d think.
If you move to another of the legacy brokerage firms— the traditional firms that alternately flog and entice their brokers to generate commission and fee revenue from your money— then you aren’t likely to reduce expenses very much, if at all. But if you move to a discount brokerage firm and make a single investment decision for what is called a balanced mutual fund, you’ll be way ahead of the game.
Your challenge to the brokerage industry is simple. Without going to Vanguard (the lowest cost vendor) and without going to indexing, you can invest in a managed balanced mutual fund with a track record Merrill is unlikely to beat, short-term or long. And you can do it at a fraction of the expense. Here are some examples, with all data from Morningstar:
- Fidelity Puritan, a balanced fund, has been in the top 17 percent, or better, in typical measuring periods over the last 15 years. The fund has an expense ratio of 0.57 percent a year and is no-load. That means it is commission free.
- T. Rowe Price has closed its knockout Capital Appreciation fund to new investors, but the T.Rowe Price Balanced fund is a reasonable substitute. It beat 75 percent of its competition over the last 15 years. It runs at a cost of 0.67 percent.
- Dodge and Cox Balanced fund has an expense ratio of 0.53 percent. It has been in the top 15 percent of competing funds, or better, in every measuring period out to 15 years.
- Mairs and Power Balanced fund has an expense ratio of 0.73 percent and has been in the top 8 percent, or better, of all balanced funds over every measuring period out to 15 years.
Will they do as well in the next 15 years? No one knows, but you have to say the same for whatever Merrill Lynch has you invested in, too.
You don’t hear about these funds because they are no-load funds and your broker doesn’t get compensated to sell them.
But if your Merrill broker would just promise to leave you alone, he could have sold you A shares of American Funds Income Fund of America or American Funds American Balanced fund. If he did that, he would have earned a good commission and provided you with a low-cost investment.
Both are moderate allocation funds (read: balanced). Income Fund has an expense ratio of 0.58 percent and has been in the top 17 percent, or better, of its competition in every measuring period out to 15 years. American Balanced fund has an expense ratio of 0.61 and has been in the top 21 percent, or better, in every measuring period out to 15 years.
You probably didn’t, and won’t, hear about the American funds because they generate less revenue for the brokerage house than wrap accounts and other management arrangements. That’s the way it is: the first consideration of a brokerage relationship is whether it is good for the broker and the brokerage house. You might come next, but it isn’t guaranteed.