Buh-bye to a fee-grubbing adviser
High-cost investments can undermine long-term retirement savings. If that's what a planner is selling, walk away.
(Money Magazine) -- Question: My insurance agent helped me set up an IRA and invested in a "target-retirement fund" - Fidelity Advisor Freedom 2040A (FAFFX). It has a 6.5% front-end load. I wanted the Vanguard Target Retirement 2045 (VTIVX ) but he told me it wasn't actively managed.
Should I stay or go?
The Mole's Answer: I'd say buh-bye to your insurance agent. Let's take a look at what he sold you and compare it to alternatives, including the Vanguard fund you suggested.
First of all, in general, I love target-date retirement funds. You pick a date that you think you will start needing to tap retirement savings and the fund company makes sure you always have an appropriate portfolio.
You seem to want to retire around the year 2040. With decades to go, such funds would currently have a healthy dose of stocks and just a smattering of bonds. As you approach 2040, the ratio of stocks to bonds will shift.
It's something you could do on your own, but this is autopilot investing that works.
On the flip side, I'm not crazy about the particular Fidelity Advisor Freedom fund that your agent sold you. As you noted, it has high front-end fees up to 5.75%. (If you were really charged 6.5%, I'd be even more concerned.)
Your ongoing annual fees are 1.06%, including some 12b-1 marketing fees that keep paying the brokerage firm. You have what is known as a Fidelity Advisor Fund, which is a fancy way of saying that Fidelity paid a commission to the agent who sold this to you.
Morningstar rates this fund a below average 2-star fund. Not exactly a shocker with those hefty fees.
Now I may not like this Fidelity fund, but I happen to be a Fidelity fan. The company has lowered its fees on some funds below that of even Vanguard, which has a sterling reputation for low expenses.
I'm guessing your advisor didn't mention the Fidelity Freedom 2040 (FFFFX) fund to you. While its name and symbol are almost identical, the fees and performances are not.
This fund happens to have no front-end sales charges and lower ongoing fees. After loads, this fund outperformed the one you were sold and gets 4 stars from Morningstar.
Why didn't your agent tell you about the other Fidelity Freedom fund? Probably because he wouldn't have made any money from you. That's the exact same reason he pooh-poohed the Vanguard 2045 fund you wanted. Vanguard doesn't pay commissions.
As your agent pointed out, the Vanguard 2045 fund isn't managed. He may have conveniently left out the fact that non-managed funds typically beat their managed counterparts. The Vanguard fund has annual fees of 0.21%, considerably less than even the lower cost Fidelity Fund.
Bottom line, I think you were right in the first place and paid your agent to steer you in the wrong direction.
If you don't need the cash for 30 or 35 years, you have a lot of time to invest. Doing so without the hefty fees you just paid to your agent will mean a lot to your financial freedom.
So, I'd find an advisor who has your best interests in mind and would pick up the phone to call Vanguard if that's what you want.
Ask Money Magazine's undercover financial planner a question. Send e-mails to: firstname.lastname@example.org.
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More from the Mole in Money Magazine:
Financial advice: Get it in writing: When making investment decisions, believe what your adviser writes, not what he speaks.
The wrong kind of advice: When your planner steers you toward expensive investments, stop and ask the right questions.
Why 'trust me' makes me nervous: Planners try to make money for clients, but also for themselves. Anyone who says otherwise is trouble.