choosing an investment management firm

[kimchi]

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Index funds are for lazy people. If you're lazy, that may be the way to go. Or, you can save up in a money market fund for a year or so, and then find an investment management firm. Most of them won't take smaller amounts.

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Index funds aren't for lazy people. Not everybody has the time nor inclination to self-select their own investment portfolio, and even if they did, they would still probably be better off indexing. Passive investing suitably meets most people's long-term investment objectives.

[LetsHugItOut]

OP,

Investment management firms like Vanguard, Fidelity, or T. Rowe Price serve two distinct functions that are relevant to your situation as an inexperienced, low-net-worth individual investor:

1) They allow you to open brokerage accounts with them. You stick your 20k into this account, and can use it to buy mutual funds, individual stocks, individual bonds, annuities, and a number of other products.

2) They manage mutual funds, including index mutual funds. Mutual funds are large, regulated pools of money that are invested by a fund manager (like Vanguard) on behalf of its clients. In return, the fund manager collects fees -- often a fixed fee (called a load fee) when the fund is purchased, and then a percentage of your money in the fund annually. Roughly speaking, there are two types of mutual funds: actively managed funds, in which the portfolio manager attempts to choose stock/bond/whatever allocations that will provide greater return/lower variance/whatever than the market, OR passively managed index funds, which attempt to MATCH markets (an easier task, and thus one achievable through passive rather than active management). Due to the passive nature of index funds, fund companies are able to charge much lower fees for these than for active funds. So while an active fund might charge you 2% annually of the money you have in that fund, an index fund might charge you 0.5%. Convential wisdom on this board and elsewhere suggests that index funds (vs. actively managed mutual funds or individual stocks or whatever else) are the best place for the passive, inexperienced investor to keep his money.

Keep in mind: these functions are distinct. So you can open a brokerage account at, say, ETrade and buy Vanguard index funds from it.

As I think you know, you're looking for a firm that will best serve function 1 for you. Many posters, however, are suggesting the firm you should choose for function 2.

The confusion may be arising because many posters here believe (reasonably) that it's smart to use the same firm for both functions 1 and 2. If you use a company like Vanguard or Fidelity for BOTH functions -- that is, open an account at Vanguard and then buy Vanguard funds in it -- there is a savings advantage in that the load fee is waived. Further, Vanguard's index funds have fees as low as any and are highly-regarded, which is why Vanguard is the firm mentioned most often in threads like this one.

The difference between brokerage firms most revelant to you, IMO, is the amount of guidance offered to clients. A firm like Merrill Lynch or Edward Jones offers maximum guidance: you can go to a branch, talk at length with an investment representative, and decide with him where you'd like to invest your money. You hand him a check, he'll invest it where you discussed, and you can talk to him when you'd like to make changes. The knock on these full-service brokerages: these investment reps a) might have no idea what they're doing and b) might pressure you into investing in products, like actively managed funds, that generate more profit for the firm.

On the other end of the guidance spectrum are firms like ETrade and Scottrade. These firms offer essentially no guidance and have no branches: all decisions are yours and all trading is done online. If you take this route, you should either a) find out what you're doing, via reading this board or other things or b) talk to independent financial planners, as another poster mentioned. You should be able to pay $X to talk to someone for a few hours. Again, there's no guarantee that these people know what they're doing, and the frequent advice here that index funds are best is good.

Somewhere in the middle are Schwab, Fidelity, and Vanguard. These firms make it very easy to open accounts and trade online completely on your own, and also have branches and call centers if you'd like to speak to investment reps. For my money, these (particularly Vanguard and Fidelity) are the smartest choices for the low-net-worth individual investor. As have been mentioned, Vanguard and Fidelity are especially good because if you open an account at one of these firms and buy index funds from the same firm, they will waive the load fee.

IMO, given that our financial decisions are some of the most important that we have to make, it is worth it to read and learn enough that you're able to, at the very least, objectively consider the advice of the Merrill guy or independent financial planner or your father or whoever and sensibly make the final call on where your money goes to.

[tannenj]

thanks a lot for this post, much appreciated. indeed, you nailed the source of my confusion: i was not aware that vanguard, for example, offers both its own index funds in addition to investment advice. in other words, the following are all possibilities:

1) opening an account with vanguard and investing in vanguard's index funds
2) opening an account with vanguard and investing in non-vanguard index funds
3) opening an account with etrade and investing in vanguard's index funds
4) opening an account with etrade and investing in non-vanguard index funds (obviously)

i'd like for my investing to be more hands-on than the experience that you say would occur with an edward jones or a merrill lynch. however, at this point, i'll rule out neither vanguard, t. rowe price, etc. nor the etrade/scottrade route.

is any of my logic flawed? anyone else have input? thanks.

[Yoshi63]

Hey there tanner-

I think you may still be a bit confused. Funds are purchased through the managers of the fund, not on a site like eTrade which gives you access to exchanges. Mutual funds aren't traded on a market like stocks are (unless they are ETF's - exchange traded funds). So if you wanted to buy a Vanguard index fund, you'd need to invest through Vanguard. However, many places (such as Vanguard) offer the ability to invest in other places' funds (such as T Rowe Price). Basically they are partnering with these other "fund families" to make it easier on their investors to get what they want. There may be a fee in some cases to buy funds from outside.

If you are planning on taking the passive route to investing, Vanguard is totally the way to go. They are very easy to set-up, and once you get going you can do everything yourself on their website. I can't compare them to their competitors, but I was highly recommended to Vanguard and have been very pleased with them.

Vanguard has a money-market which is currently yeilding about 4.8% that you can move money freely in and out of. When you want to add funds to Vanguard you have to purchase something, so I generally purchase "shares" of the money market. Once it becomes available a few days later, I am free to allocate that money to various index funds I already own, or add new funds. The money market is also a good place to keep idle money, rather than earning 1% in a savings account.

Vanguard gives you the option to expand your account into a brokerage account - so you can trade on markets like you would at eTrade. The only problem is that since they aren't primarily used for this, the fees are pretty steep (something like $50 a trade, compared to $9.99 or less at other sites). So if you intended to trade individual stocks or ETF's, I'd consider additionally opening an eTrade-type account (I personally use TDAmeritrade).

Finally, Vanguard really charges nothing for normal use. There are fees for doing stupid things, I suppose, but depositing/buying/selling/withdrawing is all free. Almost all of their funds are no-load funds, with the exeption of a few (mostly internationals). Like any other managed funds, they charge a management fee - but like others have mentioned they are very low (in the 0.5% range).

[LetsHugItOut]

Some quick clarifications:

-- Yes, all 4 options you listed are possible. You could also, of course, quite easily combine options 1 and 2 or 3 and 4 -- that is, open a single account and invest both in funds managed by that firm and funds not managed by that firm. (And nothing is stopping you from opening accounts at multiple firms if you'd like to do that for any reason!)

-- Any brokerage that you have an account with will ultimately do what you tell them to do with your money. So while Merrill might offer more guidance than Fidelity and certainly ETrade, you would of course still have complete discretion over your money at Merrill. They probably don't have the same user-friendly online experience of Fidelity or ETrade, but online trading and account overseeing is still possible at all full-service brokerages I'm sure.

-- Again, Vanguard's brokerage is in a somewhat undefined spot between a full-service brokerage and an online brokerage. So while you could get some investment advice from them, this is not as much of a focus of theirs as it is for full-service brokerages or even Fidelity or Schwab (other firms in the middle, but leaning more towards full-service). FWIW, I opened accounts with Fidelity recently and sat down with an investment rep at a branch. His recommendations (all the company allowed him to do, I'm sure!) consisted of him walking me through basic literature that's available to the public (not just account holders) at fidelity.com. I'm sure advice would be no better at Vanguard. To receive better, more personalized advice from these firms, you would need larger accounts (at least $100K+). Or you could try a full-service broker, though these probably have basic account fees or minimums that Fido and Vanguard don't.

-- Finally, there are firms that are brokerages but not fund managers (I doubt ETrade, for example, manages its own index/mutual funds) and some that are fund managers but not brokerages (CAP Group is an example). Firms like Vanguard, T. Rowe, Fido, however, are strong fund managers and have brokerages ranging from adequate to great. I don't know enough to tell you where they all lie within this range, so you'll have to do some more research!

[Foghatlive]

From reading your posts, I'd say you should go w/ #3. Put the bulk of the money in a Vanguard Index Fund, and stick a few grand in an on-line brokerage account. This will allow you to get your feet in the stock market without putting a large percentage of your roll at risk, and, if you lose the money in your brokerage account, consider it "Tuition."

My guess is that you'll eventually move most of the money into the brokerage account. Most poker players would rather make their own bets.

[Yoshi63]

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Most poker players would rather make their own bets.

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Meh. I know this isn't really advise, but it's bad to relate poker to investing. Taking the passive route is the most +EV for a huge majority of ivestors. Poker is a lot easier than individual investing.

[pig4bill]

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Hey there tanner-

I think you may still be a bit confused. Funds are purchased through the managers of the fund, not on a site like eTrade which gives you access to exchanges. Mutual funds aren't traded on a market like stocks are (unless they are ETF's - exchange traded funds). So if you wanted to buy a Vanguard index fund, you'd need to invest through Vanguard.

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It's you who are confused. You can buy just about any mutual fund with an Etrade account.

[LetsHugItOut]

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Hey there tanner-

I think you may still be a bit confused. Funds are purchased through the managers of the fund, not on a site like eTrade which gives you access to exchanges. Mutual funds aren't traded on a market like stocks are (unless they are ETF's - exchange traded funds). So if you wanted to buy a Vanguard index fund, you'd need to invest through Vanguard.

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It's you who are confused. You can buy just about any mutual fund with an Etrade account.

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Right. You can buy just about any mutual fund with just about ANY brokerage account.

[Foghatlive]

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Most poker players would rather make their own bets.

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Poker is a lot easier than individual investing.

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Considering that well over 90% of all poker players lose (Of course, on the internet, everyone wins) this is a debatable statement.