Our mutual funds have not increased in value hardly at all over the last 15 years. We have finally decided to transfer the money to our discount brokerage account and manage it ourselves. My question is: Should we transfer all of the funds at once? We are concerned with transfer fees from the fund company to our discount brokerage account and more losses in terms of deferred service charges. We have numerous mutual funds, which adds to the confusion.
No return in 15 years? Ouch. It’s no wonder that you’re looking at making a big change. Global stock markets have had tremendous volatility over that period of time, but they are generally higher than they were back then. The S&P 500, for example, is up 63% since 1997 which is a much better increase than the ‘hardly at all’ you received.
The simple answer on whether to go “all at once” is yes. As painful as it is, you don’t really want the stress of moving day to last for three months. Here are some other things to think about:
Don’t worry too much about transfer fees: Transfer fees may apply to move your portfolio over to a discount broker but they won’t likely be more than $100. Don’t delay your plan because of these fees—instead ask your discount broker if they will give you a rebate to cover them. Representatives often have discretion over these types of fees so be your most charming self when you meet with them.
Transfer your mutual finds in kind: For simplicity, I would recommend that you transfer your funds all at once, and if the discount broker offers the funds that you currently hold, you might transfer them over “in kind.” This allows you to decide later which you want to sell and when. If the funds are propriety to your current firm, or they belong to an “adviser” series versus an “investors” series that may not be possible—you will have to sell them as you move to the discount broker. A quick phone call will sort that out what’s what.
Minimize the cost of deferred sales charges: Before you tell your current firm you’re leaving, ask them to calculate the cost of the deferred sales charges on each fund you own. If you bought the funds recently, the DSC will be at its highest and if you bought them years ago the DSC may have even worked itself out already. Here are some ways to minimize the cost.
- Free: Many funds allow you to sell 10% of your holdings “free” every year.
- Matured: In some cases you can also sell the fully matured component without charge. How much of your portfolio does this apply to?
- Family: Consider whether it makes sense to transfer your fund to another fund within the same family as you wait out the DSC. For example if you own a small, high cost, underperforming sector fund you might transfer it into a lower cost, better performing Canadian equity fund.
- Benchmark: I did a non-scientific poll amongst advisers for a rule of thumb on when to sell and the consensus was that if the DSC was 3% or less than it makes sense to sell. Higher than that and you should consider the fund performance to see how bad it really is.
Cut your losses and move on: I have illustrated a few different ways to minimize the hit of deferred sales charges. But from the tone of your question, it sounds like you are more than ready to move on. It may be time for you to cut your losses, sell your underperforming funds and kick-start your new plan. My one caution is to avoid getting caught out of the market—unless you’re an expert in market timing (as if there such a thing). For example, you want to avoid selling your mutual funds in market weakness, sitting on cash for three months, and then buying back into the market after it has already rebounded, locking in your losses.
Create a simple, low cost portfolio: It is a big project to move out of mutual funds and into a portfolio that you manage yourself. MoneySense has a ton of resources on how to create a simple, low-cost portfolio so do a bit more reading to figure out your plan.
Good luck. May the next 15 years deliver you a more enviable return.