Transferring Brokerage Account

[Jimmie]

DW and I made decision to leave small bank & trust where our brokerage account is managed over a month ago. Won't get into reasons here. It is a managed account and they have us all in mutual funds/ETFs at 70:30 equity vs fixed income. For the majority of securities, we've done well from a LTCG perspective.

We've been interviewing the biggest firms and actually started before the market correction. We've made our choice yesterday and happy with our decision, as we did good job of due diligence on who is best for us (we are in the 2021 Class for ER). Now it's time to sign the TIF with our selected firm and get the process started.

We've confirmed with our selected firm that everything will transfer "in-kind". However, our current firm doesn't participate in ACATS, so it would have to be a manual transfer. The person we've selected to be our portfolio manager is recommending do the "in-kind" transfer, but then after transfer is completed, wants to discuss with us about moving everything to stocks/bonds to get rid of the fund expenses. We are not adverse to doing this, as that's what I've been doing in our retirement accounts and our main goal at this point is to balance risk with a decent dividend yield as we get close to ER.

Since this is a manual transfer that could take 2-3 weeks, we are a nervous about doing this now, as we would lose the ability to make any changes until the transfer is completed. We wonder if we would be better off selling everything before the transfer to remove this risk, since we may end up doing that in the near future after the transfer. I should also mention that LTCG from a selloff now is not a concern to us (after last 10 days, LTCG is not near as big as it was before the correction), as we have more than enough CG loss on our books to cover the LTCG this transaction would occur.

Thanks in advance.

 

[Gotadimple]

Jimmie,
Do in kind transfers to the extent that it makes sense. Keep it simple. A total sell-off adds complication. And you will have a lot of moving parts during this transition.

Transferring your funds to stocks/bonds to avoid mutual fund expenses: it depends. Yes managed mutual funds can sometimes charge a higher expense ratio than others or even index mutual funds.

What are the expense ratios on your current mutual funds? What is the commission the broker will charge for the sale of the MF and for the buy on the stocks and bonds? is it more or less than what you pay now?

Do you want to cede responsibility for stock/bond selection in the mutual funds to a broker, or do you trust the mutual fund manager to make good selections? How often will your broker recommend making changes to your portfolio? Is there a wrap fee for acting as your portfolio manager?

If you are seriously interested in maintaining a specific asset allocation, you can achieve it with 2-3 low load/no load Index mutual funds or 2-3 Index ETFs. In either you want to pay attention to the expense ratio for each investment AND to the availability and commission to buy/sell at your chosen broker.

Not much help, but those would be the questions I would have if I were making the decision.

 

[OldShooter]

... moving everything to stocks/bonds to get rid of the fund expenses. ...

I'm with @Gotadimple on this. Skeptical.

Diversification is the first question. The statisticians will tell you that you must hold 50 or more individual stocks carefully spread across sectors in order to diversify away individual stock risk. That is a lot of stocks to select and keep track of.

Bond diversification is even harder. You don't need to diversify if you stay with US governments, but it takes a pretty hefty portfolio to buy a diversified range of corporate bonds. And forget trying to adequately diversify in junk or overseas. You don't have the capability to select safe issues in these categories.

The FA's recommendation seems very odd to me. Will you pay a fee for the stock picking? Do you pay commissions on trades? How much? Is the FA really just trying to generate revenue? With respect, I think there is something fishy here.

Passive mutual fund fees are so low today that they can almost be ignored. 5bps? Even good passive international funds IIRC are below 50bps. I'll go even simpler than @Gotadimple on this: For equities, one all-world (ACWI) fund. For fixed income, appropriate ladders of US government and agency issues. No diversification problems, no bond fund fees to pay.

Re dividends, here is a good video: https://famafrench.dimensional.com/videos/homemade-dividends.aspx

 

[Onward]

Don't replace funds with individual stocks & bonds. You'll almost certainly end up under-diversified, and you'll spend too much on commissions and spreads (esp. on the bonds, unless you're buying only Treasuries from the gov't).

Just go with low-fee index funds.

I don't want to sound preachy, but if your portfolio is solid and your mentality is right, you shouldn't worry about two weeks without the ability to sell. (Withdraw any needed cash beforehand, of course.)

If you're worried about missing out on a buying opportunity, you can do that in another account.

 

[copyright1997reloaded]

Over my 40 years of investing I've met a lot of FA's. From this experience, my philosophy is the less I have to ever talk or discuss anything with them, the better. I give thanks we now have the Internet and I am able to maintain my portfolio without having to call my FA on the phone.

I'm with the others, the FA's advice seems a bit odd. I would be very wary of "moving everything to stocks/bonds" as this opens you up to things like single stock / bond risk. Note that I am not opposed to purchasing individual equities, in fact over 50% of my assets are not funds (open or closed end or ETF's). But relying on a FA to determine this .... I don't think so.

 

[Gotadimple]

The OP doesn't say, but I think they are looking at the new broker to fill the role of portfolio manager. And that's OK for those who don't like the reading and analysis to decide their allocation strategy.

And every broker is always ready to assess your portfolio and make recommendations for changes.

In my view it is just important to understand how much of one's hard-earned money is going to fees (expense ratios, commissions, wrap fees, etc). If the cost is acceptable then hire the personal portfolio manager, as long as there is oversight on their actions.

- Rita

 

[OldShooter]

... If the cost is acceptable then hire the personal portfolio manager, as long as there is oversight on their actions.

Agreed, except that the OP should recognize and understand the diversification issue. If the manager is running $1M+ AND is willing to put in the work, then good diversification is probably possible. Bond diversification (outside of US treasuries) is the more difficult problem compared to stocks.

For the OP, here is Ken French on the subject of diversification: https://famafrench.dimensional.com/...ersification-fail-when-we-needed-it-most.aspx Here is some pretty good reading as well: https://www.investopedia.com/articles/stocks/11/illusion-of-diversification.asp

 

[Texas Proud]

I'm with @Gotadimple on this. Skeptical.

Diversification is the first question. The statisticians will tell you that you must hold 50 or more individual stocks carefully spread across sectors in order to diversify away individual stock risk. That is a lot of stocks to select and keep track of.

Bond diversification is even harder. You don't need to diversify if you stay with US governments, but it takes a pretty hefty portfolio to buy a diversified range of corporate bonds. And forget trying to adequately diversify in junk or overseas. You don't have the capability to select safe issues in these categories.

The FA's recommendation seems very odd to me. Will you pay a fee for the stock picking? Do you pay commissions on trades? How much? Is the FA really just trying to generate revenue? With respect, I think there is something fishy here.

Passive mutual fund fees are so low today that they can almost be ignored. 5bps? Even good passive international funds IIRC are below 50bps. I'll go even simpler than @Gotadimple on this: For equities, one all-world (ACWI) fund. For fixed income, appropriate ladders of US government and agency issues. No diversification problems, no bond fund fees to pay.

Re dividends, here is a good video: https://famafrench.dimensional.com/videos/homemade-dividends.aspx

I remember taking my investment class in college (admittedly a long time ago) and the number was 30... IOW, when you do the math the difference a 31st stock can make to the portfolio is very small... and each stock after that is even less...

 

[OldShooter]

I remember taking my investment class in college (admittedly a long time ago) and the number was 30... IOW, when you do the math the difference a 31st stock can make to the portfolio is very small... and each stock after that is even less...

Check the second link in my post #7 just before yours.

 

[Texas Proud]

Check the second link in my post #7 just before yours.

Interesting read, but I will say that they kinda support the 30 rule in a way... they say 60 stocks is only capturing 86% of the R2, but so does 30 stocks...

Also, if you take a look at the Dow industrial it tracks really close to the S&P 500 and even the Vanguard total stock market.... hope the graph shows like I see it...

So yes, you can get decent diversification with just 30 stocks...

Edit... you can scroll to go back and forth on time periods and see that sometimes the Dow is doing better and sometimes the total market...



https://finance.yahoo.com/quote/^DJ...vciI6MC40NSwiY2hhcnROYW1lIjoiY2hhcnQifX19fQ==