Fidelity Investments Archives - The Chicago Financial Planner

Are IRA Promotions a Good Reason to Invest?

We are in the midst of IRA season and the major financial services firms are in high gear trying to convince you to invest with them.

Fidelity Investments has fired the latest salvo in the IRA promotions war with its IRA Match program. Under this program investors who transfer at least $10,000 in IRA assets to Fidelity will receive a match on their annual contributions to their IRA account for the next three years.

The matching levels range from one percent for a $10,000 transfer up to a 10 percent matching contribution for a $500,000 transfer. The maximum match over the three year period would be $1,950 for an investor who transferred $500,000 or more and makes the maximum $6,500 annual contribution (this assumes the investor is at least 50 and takes advantage of the catch-up contribution).

TD Ameritrade is offering a $2,500 incentive to existing customers who transfer at least $1 million to their IRA. They are offering $600 to new IRA customers who transfer at least $250,000 to a new account.

These and other IRA promotions are certainly attractive and if you would be inclined to invest your IRA money at the firm offering the incentive anyway then they are a good deal. But are these IRA promotions in and of themselves a good reason to choose an IRA custodian? I don’t think so.

Choose an IRA custodian based on their merits not based on some promotional incentive.

Click To Tweet

What is real benefit of the incentive?

For the investor who transfers $500,000 to Fidelity and makes the maximum contribution the total three year match of $1,950 works out to 0.39 percent of the original $500,000. For someone transferring $10,000 to Fidelity and who made annual contributions of $6,500 the total three year match of 1 percent or $195 equates to 1.95 percent of the original $10,000.

Again if the investor was going to make the transfer to Fidelity or TD or another custodian anyway based upon the custodian’s merits then the IRA promotional incentive is just icing on the cake so to speak.

What factors should drive the selection of an IRA custodian?

The decision in choosing an IRA custodian should be made based upon the merits of what the custodian offers and how they fit with your situation. Some factors to consider:

Will there be an annual fee to have the account?
What are the transaction costs on mutual funds, ETFs, individual stocks and other investments? For example if you want to invest exclusively in Vanguard mutual funds perhaps having your account at Vanguard makes the most sense to avoid transaction fees that other custodians will charge.
Is there a benefit to consolidating all of your investment accounts to a single custodian?
What services and programs does the custodian offer? For example if your needs include a trust account or financial advice how does this custodian stack up? Both Fidelity and Schwab (SCWH) tout no fee ETF transactions. Are the ETFs included under this umbrella the ones you would want to invest in?

The Bottom Line

Major financial services firms offering incentives to lure IRA transfers are nothing new. Fidelity’s IRA Match program is innovative and catchy.

At the end of the day the selection of an IRA custodian should be made based on your needs as an investor matched up with the services and fees offered by the custodian.

Approaching retirement and want another opinion on where you stand? Check out my Financial Review/Second Opinion for Individuals service.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services.

Mutual Funds – Are “Family Values” Important?

Over the years I’ve been asked whether there is a mutual fund family (or families) that I prefer. My answer is generally along the lines that I choose mutual funds and ETFs based on screening and their fit in a particular client portfolio. This is absolutely true but there are families that I do tend to use more than others.

For example, for the individual client assets which I custody at Schwab (which is the bulk of them):

Vanguard mutual funds and ETFs comprise about 22% of these assets.
PIMco mutual funds, ETFs, and closed end funds make up just over 10%.

In addition to Schwab I have individual clients with a smattering of assets at other custodians, including Vanguard.

A significant portion of my practice involves providing advice to several 401(k) plans, as well as a couple good-sized pension plans and foundations. Both Vanguard and PIMco are well-represented, along with Fidelity. In the case of Fidelity two of the larger 401(k) plans are administered by Fidelity and we do have a number of Fidelity funds in both plans (along with a number of non-Fidelity funds).

In the case of Vanguard I am drawn to their low cost index products, I rarely use their actively managed funds. In the case of PIMco the bulk of the assets are in three of their funds. Their fixed income expertise and their research orientation are impressive.

A Sample 401(k) Menu

Beyond this a look at the funds and ETFs that I use would reveal no particular loyalty to any family or fund provider. I am typically looking for something in a particular fund in a given asset class and I don’t really care which fund family they are affiliated with, unless I uncover some negative aspect about the fund company. As an example, here are the fund families represented in one of the 401(k) plans for which I serve as advisor:

Vanguard (4 index funds plus their Target Date Funds)
American Funds
American Beacon
PRIMECAP
Artisan
BMO Funds
Northern Funds
Dodge and Cox
Oakmark

Red Flags to Look For

While I am fund family agnostic, there are however, some fund family red flags that might give you pause when considering an investment. Here are three:

A sense of general turmoil. Janus is a prime example of firm where this concern is prevalent to me. The company is on its 5^th CEO since 2003 and they have experienced a noticeable amount of manger turnover.
Refusal to close popular funds. One of the things that I really like about Artisan (a relatively small fund firm in Milwaukee) is that they routinely close funds when they take on too much money for the managers to effectively manage. Perhaps the “poster child” here is Sequoia who had reopened their lone fund in 2008 after being closed to new investment for over 20 years, feeling comfortable for the first time that they could effectively manage new money. They just re-closed the fund once again in the past year. It seems to be a rule that money follows performance. A fund that has a couple of really good years will attract waves of new investors. In my opinion it is irresponsible for the fund company to keep the fund open if they don’t feel they can effectively manage these inflows. In my opinion this is the definition of greed overruling shareholder interests.
A commissioned or fee-based rep who pushes a particular fund family, especially if that family is also his/her employer. A recent example involves a lawsuit against JP Morgan Chase alleging that their reps pushed the company’s proprietary funds over those from other families. I suggest asking many questions of this rep if you like them, or better terminating the meeting on the spot if you are a prospective client.

As an individual investor I would caution you against loyalty to any fund family. Rather start out with the overall portfolio allocation that you are shooting for and then pick the best funds/ETFs to fill those “buckets.” Ideally this is an outgrowth of your financial plan. As a practical matter you might be unable to buy some funds due to investment minimums and other factors. However there are many custodians that offer access to a wide array of funds across many families. I would generally suggest going that route vs. limiting yourself to a situation where you only have access to a single family or a very small number of fund families.

As is always the case, nothing published on this blog constitutes investment advice nor should you take it as such. Please see the Disclaimer page for more.

Please feel free to contact me with your questions, comments or suggestions regarding the site.