Investing Advice/Strategy For Younger Couple

[frayne]

Recently I was helping a younger couple with their taxes and we ended up discussing IRAs, 529s, investing, retirement, etc. They showed me an IRA that a financial planner had set up for them and all of the investments were C class shares of various mutual funds, with a total value around $85K. They are young professionals in their early 30s with two children, with only mortgage debt and are concerned if their FP is giving them good sound financial direction.

Guess my question to the wise sages of the forum is; are C class shares a good route (the MFs are mostly a mix of American, Washington Mutual and some Fidelity Funds (all managed and no index funds) maybe a total of eight different funds) for this young couple or would a basket of some no load mutual finds or even a Retirement Date Target Fund be better ?

Appreciate any and all responses.

 

[jIMOh]

No one knows what will do better.

The question is do these people have the time it takes to research and manage their investments? If they do not have the time, no reason to steer them away from using an advisor.

If they have the time, even some of us here use managed funds (I am 100% in managed funds). Not all managed funds are evil.

 

[travelover]

I'd suggest that they at least become aware of all the fees, loads, etc that they are currently paying and be able to compare it to something simple like a Target Retirement or Lifestyle fund.

 

[aida2003]

Also, have you looked at the expense ratios of those managed funds? Do they have loads and/or 12b, management fees?
The least expensive funds will bite less into their returns.

 

[LOL!]

C shares are the most expensive share class for the long term. They are the worst. While they do not have front-end or back-end (after one year) loads, they have an unusually large annual expense ratio to make up for that. So instead of paying 5% one-time, one pays an extra 1% or more each and every year that one owns the fund. Ouch!

See Mutual Fund Cost Calculator - About Costs

But their FP has to be paid somehow.

 

[FIREd]

Yep, as LOL said, C shares are usually the worst. If A, B or C shares are the only options available, I personally prefer A shares. Pay the load up front and be done with it. Also you know how much commission you will pay BEFORE making the investment.

 

[brewer12345]

Ugh. What's wrong with plunking everything into a balanced fund and forgetting about it? You don't need to pay a planner to do that.

 

[donheff]

Ugh. What's wrong with plunking everything into a balanced fund and forgetting about it? You don't need to pay a planner to do that.

Yeah, or pick some simple couch potato portfolio with VG or Fidelity indexes and forget about it. It would seem that you would have to be pretty confident of your understanding of the funds and the managers to do better with managed funds. If the couple is turning to you for advice it doesn't appear that they have such competence or are confident that their adviser does.

 

[LOL!]

Ugh. What's wrong with plunking everything into a balanced fund and forgetting about it? You don't need to pay a planner to do that.

I've come to the conclusion that many folks want deniability. That is, they want to be able to blame someone else for the poor performance of their investments and not themselves. They have absolutely no self-confidence.

 

[Marquette]

I've come to the conclusion that many folks want deniability. That is, they want to be able to blame someone else for the poor performance of their investments and not themselves. They have absolutely no self-confidence.

It might be that, but I think there's more to it.

My wife and I aren't dunces. However, we're always slightly terrified of doing it ourselves. We do, but it's hard to feel like we picked right when there is no "right" answer.

So, part of it is some sort of cult of specialization. As a specialized technical person, I tend to interact with other highly specialized people. This carries into other aspects of life as I subconsciously expect the investment specialist to be able to do better than I can. Even in the face of overwhelming evidence that I'm doing ok (my AA at this point has largely behaved like I expected it to) and that specialists tend to do no better over the long term, I'm still uneasy at times. I don't get to find out until 10 years down the road if I'm right or not and the cost of being wrong is my retirement.

There's probably shades of this going on:

- Laziness (shrouded as "that's too tough for me to figure out; I don't have the time")

- Culpability ("My partner won't blame me, this guy made those choices for us; It's his fault not mine")

- Reassurance ("I think I'm doing ok but, gosh, I don't know. I wish someone could tell me")

and probably a lot more...

 

[FinanceDude]

Recently I was helping a younger couple with their taxes and we ended up discussing IRAs, 529s, investing, retirement, etc. They showed me an IRA that a financial planner had set up for them and all of the investments were C class shares of various mutual funds, with a total value around $85K. They are young professionals in their early 30s with two children, with only mortgage debt and are concerned if their FP is giving them good sound financial direction.

Guess my question to the wise sages of the forum is; are C class shares a good route (the MFs are mostly a mix of American, Washington Mutual and some Fidelity Funds (all managed and no index funds) maybe a total of eight different funds) for this young couple or would a basket of some no load mutual finds or even a Retirement Date Target Fund be better ?

Appreciate any and all responses.

Not all C shares are created equal. In American Fund's case, their C shares switch to F shares after 10 years, and the 12B-1 drops to .25% a year.........

Washington Mutual Shares:

Class C: 1.40% a year, composed of:

Management expense: .23%
12B-1 fees: .99%
Other expenses: .18%

The 12B-1 is higher because of no front end load. Just some info for you.......

 

[FinanceDude]

C shares are the most expensive share class for the long term. They are the worst. While they do not have front-end or back-end (after one year) loads, they have an unusually large annual expense ratio to make up for that. So instead of paying 5% one-time, one pays an extra 1% or more each and every year that one owns the fund. Ouch!

Most broker-dealers limit the time frame for client monies to be authorized for C shares. At my B/D, for instance, we have the client sign a comparison form by FINRA showing the difference between A and C share costs. In addition, the client signs a form that states the C share investment is not long-term money, and that they understand A share breakpoints and that A shares are better for long-term investments. If the advisor still thinks they are appropriate, he/she has to provide a additional form spelling out the reasons why and Compliance has to agree or the share purchase is not allowed.

Not all B/D operate with this high level of scrutiny, but it's becoming more common...........