Index Funds Pros and Cons

[LOL!]

True, but I was referring to the fact that people can deduct their management fees on an annual basis on their taxes, what you are saying is true, but happens upon sale, which could be several years out............

Is it not true that one can deduct only those expenses that exceed 2% of your AGI and then only if you itemize?   If that's true, I hope I never even come close to paying 2% of AGI in management fees.

And there are some very low expense ratios for some index funds.  For example, in our 529 accounts, we own VIIIX with er of 0.03%.    VTI, the total stock market index ETF, has an expense ratio of 0.07%.  (Yes, I know there are a bid/ask spread and NAV issues.) It may be better to own VTI instead of a mixture of SPY, MDY, and IWM.

 

[Hydroman]

I know it's popular here to demonize an entire industry, but the truth is that there are some really good advisors and advisory firms out there.

In your opinion is Paul Merriman's advisory firm one of the good ones?

 

[youbet]

I know it's popular here to demonize an entire industry, but the truth is that there are some really good advisors and advisory firms out there.

I suppose there must be somewhere. The problem is sorting through the zillions of duds to find a mediocre one.

 

[FinanceDude]

HAHA  I work for an advisory firm.  Our fee schedule is around 75BPS max and generally head down from there.  Our avg account size is in the 7 figures which is why our fees are lower than most firms. 

We implement our allocations mostly with ETFs and DFA funds, so say that the max avg would be 1% of total assets.  I think you're mistaken in believing that ALL people are getting is investments.  Most firms offer planning, advice, meeting with your other advisors,bill payment, liabilities management, insurance analysis etc.  I happen to think that our firm is quite good with the services we offer. Many of our clients have are very financially astute, and have zero interest or time to do any of these activities themselves. 

I know it's popular here to demonize an entire industry, but the truth is that there are some really good advisors and advisory firms out there.

Very good point, but I believe the reason is MANY people on here have taken a bath working with so-called "advisors" in the past..............

Funny how we never have these discussions about insurance agents or attorneys on here..........I guess those are the "honorable professions"............

 

[Nords]

Is it not true that one can deduct only those expenses that exceed 2% of your AGI and then only if you itemize?   If that's true, I hope I never even come close to paying 2% of AGI in management fees.

Keep in mind that the uproar over paying 1% (or more) of your portfolio in management fees occurs when you retire and realize that you're already limiting your withdrawals to 4% (or less).

Your retirement AGI is hopefully a lot lower than your working years.

 

[FinanceDude]

Well........depends on what your goals are..........if you earn $70,000 a year before ER, and 4% is $75,000 a year, so be it...........

 

[youbet]

Funny how we never have these discussions about insurance agents or attorneys on here..........I guess those are the "honorable professions"............

Well, you guess wrong.  insurance agent and honorable profession = oxymoron.  Sort of like calling a gas chamber operator an honorable profession.  I'm sure there must have been an honorable gas chamber operator somewhere, but probably not really typical!

 

[FinanceDude]

Well, you guess wrong.  insurance agent and honorable profession = oxymoron.  Sort of like calling a gas chamber operator an honorable profession.  I'm sure there must have been an honorable gas chamber operator somewhere, but probably not really typical!

How about attorneys

 

[youbet]

I'm not going there!   

 

[FinanceDude]

I'm not going there!   

Why not, afraid to get "sued"

 

[haha]

Funny how we never have these discussions about insurance agents or attorneys on here..........I guess those are the "honorable professions"............

Are you sure you have been here long enough to say what we "never" have done?

Ha

 

[saluki9]

In your opinion is Paul Merriman's advisory firm one of the good ones?

Hmmmmmm, I'd probably say no. Here is my reasoning

1. In his ADV he lists Charting and technical analysis as his primary asset allocation determinates. That sends shivers up my spine

2. He uses DFA funds which is a great thing, but he charges 1% off the top for buy and hold portfolios and OFFERS NO OTHER SERVICES

3. He has seminars, books, a website, etc. Being a good financial advisor is in some ways like being a good surgeon. You need to be available to your clients at all times, and your clients deserve nothing less than your full undivided attention. There is a reason the firm I work for hires PMs like myself. It's because actually advising the clients is a full time job so they hired me to do what the advisors can't or don't have time for. This guy seems like he has his hands in too many pots. In the ADV it says they can make accomodations to see you in person if you want. At our firm (and most good firms) if 2 months go by and you have not seen somebody from our company that would be very very rare.

 

[LOL!]

Is it not true that one can deduct only those expenses that exceed 2% of your AGI and then only if you itemize?   If that's true, I hope I never even come close to paying 2% of AGI in management fees.

My question really did not get addressed yet ... there was a big side-step around it.

This is not unlike the idea that your fee to an accountant to prepare your tax-return is tax-deductible.    TurboTax puts itself down on Schedule A as deductible, but then since you rarely reach the 2% floor for misc itemized deductions, that deduction is not counted.

I'll agree that if you get nickeled and dimed enough that these misc deductions add up, but that's still not a good use of money IMHO.

 

[FinanceDude]

Are you sure you have been here long enough to say what we "never" have done?
Ha

No..............but you know that........... I guess I'll hang out at the woodshed by myself...............

 

[retire@40]

Quote from: FinanceDude on September 26, 2006, 02:53:00 PM

One more thing:  Management fees can be deducted on your taxes, commissions can not............

Commissions are deducted from the sales price when determining your gain on the sale of the asset.

Management fees can only be deducted if your itemized deductions are higher than your standard deduction.  Some people can go their entire lives not being able to deduct management fees paid.

Commissions are always deductible in that commissions paid to acquire are added to the basis and commissions paid to sell are deducted from the gross sales.  Everyone that pays commissions such as these gets the deduction.

 

[mathjak107]

Dont forget looking at the top funds every year 6 or 7 of them out of 10 are all load funds. True whats on top one year may be the bottom the next but non the less when your on top your on top.
Nothing wrong with higher fund expenses or loads if you are getting something extra in return.

To make blanket statements about always picking lower cost funds isnt always true

 

[astromeria]

whats on top one year may be the bottom the next

And you don't know in advance which will be on top/bottom the following year. Not to mention that managed funds can have that end-of-year smack-down when they're out of losses to mitigate their gains.

 

[jazz4cash]

Has anyone ever noticed the differences in performance between index funds from various companies for the "same" Index? Many companies offer SP500 Index, but the performance can vary quite a few bp. If you check individual fund performance vs. the Index itself, the expenses make up the difference. I presume it also has to due with management style, cash required on hand for redemptions, etc. Vanguard and some Institutional funds are very close to the Index, reflecting thier low expenses. We have one in our 401k that routinely beats the Index! (pretty cool).

 

[FinanceDude]

Has anyone ever noticed the differences in performance between index funds from various companies for the "same" Index?  Many companies offer SP500 Index, but the performance can vary quite a few bp.  If you check individual fund performance vs. the Index itself, the expenses make up the difference.  I presume it also has to due with management style, cash required on hand for redemptions, etc.   Vanguard and some Institutional funds are very close to the Index, reflecting thier low expenses.  We have one in our 401k that routinely beats the Index! (pretty cool). 

IMO, anyone outside of Vanguard offering a S&P 500 fund is doing it to keep their clients from going to Vanguard..........and their expenses are way out of line...........

I'll post the worst one I've found on here............gotta dig through some papers first................

 

[mickeyd]

I once worked for a firm that had an S&P 500 index fund in their 401(k) plan that had an ER of 1.56%!!! When I inquired why the ER was so high in comparison to other S&P500 funds, I was informed that the process that the MF company used to select the stocks in the fund was very complex and a "company secret" and this added to the expenses but generated a better return for the fund in the long run.

Seems like I recall that the total return was around 1.5% or so below the benchmark.

regards,
mickeyd

 

[FinanceDude]

I once worked for a firm that had an S&P 500 index fund in their 401(k) plan that had an ER of 1.56%!!! When I inquired why the ER was so high in comparison to other S&P500 funds, I was informed that the process that the MF company used to select the stocks in the fund was very complex and a "company secret" and this added to the expenses but generated a better return for the fund in the long run.

Seems like I recall that the total return was around 1.5% or so below the benchmark.

regards,
mickeyd

 

[JohnEyles]

IMO, anyone outside of Vanguard offering a S&P 500 fund is doing it to keep their clients from going to Vanguard...................

Does this apply to SPY ? As best i can tell, it is an ETF that follows the
S&P500, and has very low OER of 0.10%. Is there some reason not to
use it as my S&P500 index ?

 

[FinanceDude]

Does this apply to SPY ?   As best i can tell, it is an ETF that follows the
S&P500, and has very low OER of 0.10%.   Is there some reason not to
use it as my S&P500 index ?

Well............it is an ETF, not a fund. Fact is, there's huge volume in ETF's everyday in the market.

I was referring to mutual funds that track the S&P................

 

[JohnEyles]

Well............it is an ETF, not a fund.  Fact is, there's huge volume in ETF's everyday in the market.

I was referring to mutual funds that track the S&P................

I just meant is SPY a reasonable alternative to an S&P500 index fund ?
I mostly understand how the ETFs and mutual funds differ. I'm in Schwab
and would rather pay $13 to buy the ETF than $50 to buy a Vanguard index
fund. Plus the SPY has lower OER. (Sure I could open a Vanguard account too).

 

[FinanceDude]

I just meant is SPY a reasonable alternative to an S&P500 index fund ?
I mostly understand how the ETFs and mutual funds differ.  I'm in Schwab
and would rather pay $13 to buy the ETF than $50 to buy a Vanguard index
fund.  Plus the SPY has lower OER.  (Sure I could open a Vanguard account too).

I like SPY better than any S&P index fund, but that's a personal decision. There was a time when money could be made trading them, but those days seem in the rear view mirror.

Some of the other ETF's like Barclays have some interesting ones, and of course you can get wild with Diamonds, Cubes, and other jewelry...........