Mutual Funds vs. ETFs / hard sell from investment firm

[FIREHAPPY]

My currently assigned financial advisor at my well known investment firm has contacted me 3-4 times in 2020 to discuss selling out of my long held, low cost mutual funds to more "tax friendly" ETFs. (I take mutual fund distributions as cash to fund some of my expenses in retirement)

I have significant gains in these funds since I've held them for decades. I haven't met with him to do the math but I'm suspicious there must be some ulterior motive since I would pay significant capital gains just to get into more 'tax efficient' ETS.

I just received another push from him to meet to talk. I even asked him if the firm's 'signature' mutual fund which i am invested is no longer a good investment and he backed down and said he would never disparage the fund.

Anyway, wondering if others have had similar conversations with your advisor recently and if there really is value in discussing this..... or is this simply a way for the firm to generate additional fees.

 

[njhowie]

Tell him to show you his month end statement and if you see a significant amount in the ETFs being pitched then you'll sit down and speak with him. Short of that, simply tell him "Please don't contact me, I will contact you when I need your assistance".

I have an excellent relationship with my Fidelity rep. I've been "working" with him for the past 5 years more or less. He was aware from our first meeting that I did not need his assitance, nor was I really interested in it. I send him an Xmas card with Amazon gift certificate every year, I never hear from him. But, if I do require something, I send him an email and he's on it instantly.

 

[pb4uski]

Tell him that along with his recommendation to swap the fund for the ETFs that he needs to provide you with the tax implications and that you are not keen to pay capital gains taxes unnecessarily to get into these more tax efficient funds. With any luck, he'll realize that you are not the normal sucker and will go away.

 

[RunningBum]

I think your instincts are right. Have you asked him about the large tax impact of selling those long held funds, compared with the likely small impact of CG distributions?

Tell him you are uncomfortable coming into the office because of the pandemic, but if he'll write up the proposal with the above tax considerations, fees, and any differences in the nature of the funds, you'll consider it. There's no reason he shouldn't be able to do this. My guess is that he wants to get you in person so he can confuse you by throwing some numbers at you without much time for you to consider them, and then put some pressure on you to make the decision right then and there. Tell him that even if you came into the office you'd want to take the information back home with you so that you have time to understand and consider everything.

If you are paying this FA/firm an annual fee, I would transfer the funds to a brokerage that doesn't charge.

 

[Ncc1701]

I can't see how he's generating fees by pitching ETFs. There would only be two methods of doing so:

1. There is a full commission charge when buying the ETF
2. You are enrolling in a fee based account where an advisory fee can be charged on the assets held in ETFs.

In any case, he would have to mark the orders as solicited and notate justification for doing so. And if you've got low cost index funds and you're switching to ETFs, the justification is a weak one.

 

[FIREHAPPY]

Appreciate all the feedback. For clarity, one of the mutual funds, which I've held since the 90s and has performed really well for me, does have an expense ratio on the high side of .85%. It will have a larger than normal distribution in a few weeks. He suggests i sell before the distribution. I still can't get my head around selling out of this fund and other funds (capital gains) to reinvest in an ETF.

I don't pay the advisor, he comes as an added service as part of my relationship with the firm.

 

[njhowie]

It will have a larger than normal distribution in a few weeks. He suggests i sell before the distribution.

Why? So you don't pay tax on the distribution but you pay the capital gains tax on your entire holdings (which includes the amount of the distribution)?

And what's the difference if you were to sell after the distribution? You pay tax on the distribution, and then capital gains tax afterwards on the remaining amount - which was reduced by the distribution.

For that alone, I'd tell him to back off.

 

[jazz4cash]

Yep. I’d tell him “sure I’ll flip to the ETFs if you guys provide an incentive to offset the CG tax hit.” I think fund companies like ETFs because they think investors are more likely to trade actively.

 

[RunningBum]

Well, that brings a whole 'nother set of questions. The FA might have a point.

What is the expense ratio of the ETFs?

What are your long term plans for the fund? Will you eventually be selling it? If that's the case, it might be better to sell it now rather than pay more in fees for years and eventually pay the CGs anyway.

Even if you hold and hope your heirs get stepped up basis, it may not work out. Calculate the state and fed tax on the gain, compare to the difference in fees each year on the whole amount. Holding for heirs would also run the risk that stepped up basis on inheritance goes away.

Is there any reason like an ACA subsidy cliff to stay away from that you'd want to keep your income low this year?

I'll stop here because it's hard to give advice with information trickling in like this, and still not having the whole picture.

 

[OldShooter]

Appreciate all the feedback. For clarity, one of the mutual funds, which I've held since the 90s and has performed really well for me, does have an expense ratio on the high side of .85%. It will have a larger than normal distribution in a few weeks. He suggests i sell before the distribution. I still can't get my head around selling out of this fund and other funds (capital gains) to reinvest in an ETF.

I don't pay the advisor, he comes as an added service as part of my relationship with the firm.

Sorry to say, this "free" advisor is not free at all. He has expensive misunderstandings about investing. (1) For example, selling before the fund goes ex-dividend will save you very little if anything. (2) He doesn't understand the importance of tax issues in tactical decisions. (3) He may even be looking at some kind of sales contest or other reward for churning you into specific ETFs. (My guess is that #3 is a factor.)

For me this is a one-strike-and-you're-out situation. I suggest that you contact the branch manager, explain the reasons you don't trust this "free" advice, and work with him/her to find a rep with whom you hopefully can develop some trust.

For grins, you could run a brokercheck on your guy, too. Usually those are pretty benign but not always. https://brokercheck.finra.org/ Definitely do this before you agree to accept a proposed new rep.

 

[pb4uski]

Appreciate all the feedback. For clarity, one of the mutual funds, which I've held since the 90s and has performed really well for me, does have an expense ratio on the high side of .85%. It will have a larger than normal distribution in a few weeks. He suggests i sell before the distribution. I still can't get my head around selling out of this fund and other funds (capital gains) to reinvest in an ETF.

I don't pay the advisor, he comes as an added service as part of my relationship with the firm.

That's lousy advice... either way, you're paying capital gains tax on the capital gains distribution either by receiving it directly if you stay or included in the NAV and the proceeds from the sale if you sell.

Before any sale, are you in the 0% or 15% capital gains tax bracket?

 

[marinauser]

If the funds were in tax deferred accounts where there were no tax consequences, then I would probably make the switch. In taxable funds, if you have Vanguard funds that have an ETF class in that fund, I believe that you could make the change tax free. With at least index ETFs, you tend to avoid capital gain distributions and you can avoid the sale/purchase rules for funds if you tend to trade those funds. If you don't need all of the capital gain distributions that your funds make to fund yearly retirement expenses, ETFs may be more appropriate since at least index ETFs tend to be very good at avoiding making capital gain distributions - generally keeping you income lower. If you would make the same amount of sales of ETFs each year to fund retirement, then you are not postponing taxes by switching to ETFs.

 

[BarbWire]

If the funds were in tax deferred accounts where there were no tax consequences, then I would probably make the switch. In taxable funds, if you have Vanguard funds that have an ETF class in that fund, I believe that you could make the change tax free..

I did exactly this at VG about three years ago: like-for-like switch from index funds to the comparable ETF. In the end it was fine, but I was very glad that I had spreadsheets and screenshots showing the value and cost-basis on the mutual funds because they really messed that up for the corresponding ETFs and it took a while to straighten out.

 

[FIREHAPPY]

Two years down the road from my original post!

I received another call today from my brokerage firm suggesting I move out of Contrafund to a more tax efficient SMA. I realize Contrafund has a high management fee compared to other low cost funds, but I've held it for 25+ years and gains are well over 100%. They never mention any of my other funds such as Total Market Index.

(I take all Contrafund capital gain and dividend distributions each year as cash to help fund a portion of my retirement)

Is it really worthwhile to trade the fund and pay the big capital gains hit just to get to a more tax efficient SMA? (they are suggesting SMAs now, not ETFs.

It's confusing to me that I calls each year to move out of Contra.

Would appreciate your thoughts & comments.

 

[RunningBum]

I don't even know what an SMA is.

 

[braumeister]

Separately Managed Account.

 

[OldShooter]

... Is it really worthwhile to trade the fund and pay the big capital gains hit just to get to a more tax efficient SMA? ...

Of course not. They are not interested in your tax situation. Their sole interest is in the fees that you will pay if they suck you in with the SMA story.

I would just leave. Transfer in kind to one of the big three often mentioned here and make very clear to the new rep that you are not and never will be interested in having a paid advisor.

 

[RetiredAt49]

Of course not. They are not interested in your tax situation. Their sole interest is in the fees that you will pay if they suck you in with the SMA story.

I would just leave. Transfer in kind to one of the big three often mentioned here and make very clear to the new rep that you are not and never will be interested in having a paid advisor.

OldShooter is a smart cookie [emoji514]… I took his advice many months ago by firing my FA and moving 80 individual stocks to low cost index funds…. I left one IRA account alone and it’s performance is much worse than VOO or VTI.

 

[youbet]

OldShooter is a smart cookie [emoji514]… I took his advice many months ago by firing my FA and moving 80 individual stocks to low cost index funds…. I left one IRA account alone and it’s performance is much worse than VOO or VTI.

What's in that IRA account you left alone.? It's impossible to compare to VOO/VTI without knowing that.

 

[RetiredAt49]

what's in that ira account you left alone.? It's impossible to compare to voo/vti without knowing that.

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[youbet]

^^^^^

You're saying the advisor picked these stocks for your IRA?

 

[RetiredAt49]

^^^^^

You're saying the advisor picked these stocks for your IRA?

Yep

 

[youbet]

And you looked at the ytd performance of your IRA and compared that to VOO?

 

[Sunset]

Two years down the road from my original post!

I received another call today from my brokerage firm suggesting I move out of Contrafund to a more tax efficient SMA. I realize Contrafund has a high management fee compared to other low cost funds, but I've held it for 25+ years and gains are well over 100%. They never mention any of my other funds such as Total Market Index.

(I take all Contrafund capital gain and dividend distributions each year as cash to help fund a portion of my retirement)

Is it really worthwhile to trade the fund and pay the big capital gains hit just to get to a more tax efficient SMA? (they are suggesting SMAs now, not ETFs.

It's confusing to me that I calls each year to move out of Contra.

Would appreciate your thoughts & comments.

If you want to move to more tax efficient ETF's , you could sell a little bit each year to keep within the non-taxable LTCG income level depending upon your other sources of income.

 

[RetiredAt49]

And you looked at the ytd performance of your IRA and compared that to VOO?

Yep as well as confirmed it using portfolio visualizer