IRA full service or discount broker?

**sweeps** · 03-13-2008, 06:50 AM

Fidelity, Vanguard, or T. Rowe Price. Avoid the "full service" brokers, unless you enjoy spending a lot of money on fees.

If you're a newbie to investing, you can choose one of the lifecycle funds, for example Vanguard Target Retirement 2040. With one fund you have nearly complete diversification. Over time as your balance gets larger and you learn more about investing, you can transfer to other funds.

If you're interested in buying individual stocks and ETFs (although I wouldn't recommend this if you're a newbie), check out Scottrade.

**disneysteve** · 03-13-2008, 07:01 AM

Originally posted by sweeps View Post

Fidelity, Vanguard, or T. Rowe Price. Avoid the "full service" brokers, unless you enjoy spending a lot of money on fees.

I agree. There is really no reason to use a full service broker. If you plan to invest in mutual funds in your IRA, open your account directly with the fund company. If you want to invest in individual stocks, go with a low cost online broker like Scottrade or Sharebuilder or one of those.

**Scanner** · 03-13-2008, 07:50 AM

Now. . .I'm going to say it depends.

If you have a lot to save every year, like IMO, $20,000 or more. . .then a financial planner (full service) may not be a bad idea. May is the operative word because I don't know all the details of your life.

That being said, I would probably gravitate more towards a CPA/CFP vs. a financial planner at let's say AG Edwards or some other full service like PaineWebber.

If you are an average investor, with $1000-20,000 to invest each year, I completely agree with the above - sticking $5000 in your Roth IRA in a Target Fund until you get more familiar with portfolio construction is just fine.

It just kind of depends on how much you think you'll be hands on or hands off.

EDIT: Another thing. . .you are opening a SEP-IRA and your contributions can be quite large (up to $30,000/year). I know being in business for myself that "networking" is key. So. . .having a financial advisor (who has his own network that can potentially refer) may not be a bad idea.

That is, yes, it's cheaper and more efficient to go with a discount brokerage, but don't miss the forest for the trees. IF the financial advisor goes to a country club and can refer you major clients. . .well. . .it may be worth it to "payroll him."

This is how business works.

**Troyrb** · 03-13-2008, 09:18 AM

Thanks for your help. Well here is my situation. I'm new to investing and have a very low risk tolerance level. I was looking to open a SEP IRA with 20 to 30k and since about the only thing that is showing any types of returns now is Money Markets. I was going to place the money it in their till the market turns up a little.

A friend of mine is a State Farm full service broker. She told me if I went with them then the fees would basically knock out any earnings made in the IRA Money market, but I wouldn't be losing money like if I was in a Mutual Fund. I like the idea of not seeing any drop in my investment but I don't like the idea of paying their fees for a simply money market and not earning anything on it.

**disneysteve** · 03-13-2008, 09:20 AM

If all you want is a money market, I'd call Vanguard and put the money in Vanguard Prime. With 20K, you won't have any fees and when you are ready to put the money into growth funds, which you must do if you have any hope of accumulating enough to retire, you'll be in a good place to do it.

**sweeps** · 03-13-2008, 09:39 AM

I agree with Steve. Vanguard is always at or near the top of the rankings for money market funds.

That was nice of your friend to warn you of the fees. Many financial planners and full service brokers will downplay the real cost of the commissions, fees and expenses they're charging you, while exaggerating the performance of the investments they're offering. (But I suppose you can't blame them, that's how they put food on the table.)

I would encourage you to dip your toe into stock funds at some point. Putting all your savings into money market funds won't give you a safe and comfortable retirement -- that is, unless you're already rich to begin with.

**Scanner** · 03-13-2008, 10:27 AM

Thanks for your help. Well here is my situation. I'm new to investing and have a very low risk tolerance level. I was looking to open a SEP IRA with 20 to 30k and since about the only thing that is showing any types of returns now is Money Markets. I was going to place the money it in their till the market turns up a little.

A friend of mine is a State Farm full service broker. She told me if I went with them then the fees would basically knock out any earnings made in the IRA Money market, but I wouldn't be losing money like if I was in a Mutual Fund. I like the idea of not seeing any drop in my investment but I don't like the idea of paying their fees for a simply money market and not earning anything on it.

You see. . .this is one of the pitfalls of going it alone and relatively uninformed. . .again, I don't use a full service brokerage, I want to disclose that.

But if you had followed our advice and put it in a Target Fund and lost 10% this year (a distinct possibility), you would have been very distraught.

You just aren't comfortable watching your balance go up and down.

A financial advisor would sit down with you and get a feel for your risk tolerance level. He'll educate you on types of risk - principal risk and inflation risk being the biggies. You sound very conservative. . .so you should probably be mostly bonds and cash instruments so you don't see any of your principal erode year to year.

Even Target funds, as simple as they are, post losses on certain years.

There are ways to be a conservative investor; it's probably beyond the scope of this thread.

I don't know. . .I am leaning towards you getting hooked up with a financial advisor and the fees spent may be worth it, if you dont have the energy, time or wherethal to do research.

**sweeps** · 03-13-2008, 10:45 AM

Scanner, then why are we here? Under that logic, we will never know everything there is to know about a poster's situation so we should close up shop and send everybody to a high-priced broker where they will be gouged.

If OP had gone directly to a financial planner he might've ended up with a costly, underperforming variable annuity. We are providing a free opinion without the inherent conflict of interest. OP can take it or leave it.

**Scanner** · 03-13-2008, 12:31 PM

Sweeps,

Well. . .I hear you. . .I don't mind taking people under our wing and educating them. It's fine. I like it. That's why I come here.

But my logic, as you put it, is sound.

We should all probably be a little more careful with the "vanilla" advice we dispense here.

Have you ever been self-employed? I have.

I dont' want to get into the breadth of it but it's different than having a job with a 401(k). It's a different lifestyle. You take incredible risks to get the money and the psychology is, "Now that I took the risk and made 20-30K to save, I don't want to risk what I have got."

And you know what? That psychology ain't that far off from reality.

Like I said, we all said (including me) "Put it in a Target fund."

Well, that may not be right for everyone.

He may put it there, have it go down 10%, been peeved, pulled it out, put it in cash, and then it ran up 20%, while he earned 3% after losing 10%.

If he's self-employed, successful business person, like I said, the two aren't always correlated (one may theorize good business people are marginal to lousy personal finance/investors), he may benefit from a relationship with a financial planner, who will discuss debt management, taxes, investing, etc.

I do agree with you - you have to watch it - even with so-called-friends, you can get gouged into inappropriate products. "Friends" are unfortunately often caught up in a bad system.

The financial planning industry definitely needs restructuring in the way they incentivize financial advisors.

The fairest system to me seems to be %age (typically 1%) of assets managed. Sales of specialized products (life insurance, annuities) should be outsourced.

That way, when you have a sucky year, well, the financial planner's income goes down (if he adds no clients that year theoretically).

If he wants to learn and attend to his investments 1-2X per year, there are plenty of books out there to prime him and I don't mean to not welcome him here.

But the subject is "full service" or "discount" so I stuck to the subject.

**Troyrb** · 03-13-2008, 12:31 PM

After hearing all your replies I'm leaning toward my first choice of going with Charles Schwab.

I don't know if I should open a separate post for this next question but I guess I will just ask it here.
Is now a good time to start a IRA with the market being in the tank? I'm scared because all you hear on the new is bad news daily. I feel I need to get into a SEP IRA to lower my taxes owed for 2007. I guess I'm looking for advice on whether I should consider this down turn a good time to buy into a Mutual Fund or should I be conservative and stick with a Money Market?

**Scanner** · 03-13-2008, 12:48 PM

Actually, Troyrb,

Schwab may be a nice middle ground here. I just moved all of my assets (banking and investments) to Schwab Bank and Brokerage.

The banking is great - competitive interest rate for checking/savings and free ATM at any PLUS ATM. The brokerage offers 1000's of mutual funds and doesn't charge any premium over it's normal expense ratio (or load).

Schwab's MM is competitive too (probably not as high as Vanguards).

The nice thing is, if you need advice at any time, then. . .for a fee, you can access their full service division (I never have nor probably plan too).

But they can answer basic questions like what is a Roth, SEP-IRA, etc. There's no charge for that.

Now to answer your question:

Is now a good time to start a IRA with the market being in the tank? I'm scared because all you hear on the new is bad news daily. I feel I need to get into a SEP IRA to lower my taxes owed for 2007. I guess I'm looking for advice on whether I should consider this down turn a good time to buy into a Mutual Fund or should I be conservative and stick with a Money Market

Yes, now is a great time to have cash sitting around. Most mutual funds are down for the year as you note.

But. . .you never know. . .they may go up. . .or they may go down for another year or two. We could be in for a 2-3 year bear like the early 00's.

It's what you can tolerate.

It's impossible to time it. We don't know when the bottom will be until one day, the Dow goes up 800 points in one day and then you've missed it.

"Oh yeah, the bottom was yesterday."

A MM will get you a 4-5% return. If you can live with that very low risk to your principal and live with the inflation risk (that saving money at that low of return won't grow enough as the cost of living rises), then stick it there until you figure out what you are comfortable with.

It's not that hard to get the basics.

I'd imagine most investors here are probably down 5-10% for the year so far but they aren't crying in the beer. They just keep buying waiting for the next bull run.

I am one of the lucky ones and I am up. So. . .I'm probably due for a cry in my beer

There is no right and wrong; it's what you can live with.

**Scanner** · 03-13-2008, 12:55 PM

Ask-the-Mole:-The-Right-Time-for-a-Conservative-Portfolio: Personal Finance News from Yahoo! Finance

Troy,

Here was good article on risk tolerance published today at Yahoo!

**sweeps** · 03-13-2008, 12:57 PM

Troy, if this money is for retirement -- which I'm assuming it is because you're putting it into an IRA -- and retirement is more than, say, 10 years away, then absolutely YES you should be putting the money in a good, diversified, low-cost stock fund. The time to buy stocks is now while the market is down. Could it go lower in the short term? Absolutely. But you are investing for the long term.

As Scanner points out, if you happen to be very risk averse and wouldn't be able to sleep at night then start off with most of your money in a money market fund. Maybe put 10% in a stock fund? Over time you may gain confidence.

IRA full service or discount broker?