Where to purchase mutual funds and ETFs
Whenever possible, low cost no load mutual funds should be purchased directly from mutual fund families that deal with the public. Otherwise they should be acquired through some other low cost channel such as a discount brokerage account. It only makes sense to purchase funds through the most inexpensive channel possible. Direct purchase of these mutual funds usually should entail little or no cost on your part. There should only be very modest account custody fees that often are waived for balances above certain thresholds.
“Full service” brokers and financial advisors do not have reliable methods for choosing mutual funds and ETFs that will “out-perform” their indexes, although there is certainly no shortage of brokers and other financial intermediaries who will claim, suggest, or imply that they can. Just save you money and buy inexpensive no load mutual funds directly from the mutual fund companies themselves. It is not difficult, and you do not need to let an advisor keep his hand in your wallet for years just to make some straightforward investment purchases.
Regarding ETFs, your will find that there is a wider variety of vendor names from which to choose. The good news is that ETFs trade like stocks and you should be able to buy any of the ETFs on this list through a single discount broker account. Therefore, if you wish to invest in ETFs, I suggest that you open one or, at most, two discount broker accounts.
The downside of having two accounts includes duplicate account paperwork, separate statements, and learning/remembering another web interface. In addition, there is probably no reason to have more than one discount broker, if in addition you also intend to set up direct purchase accounts with a few mutual fund families.
Compared to ETFs, low cost, no load index mutual funds are usually a better choice for most individual investors pursing a long-term buy-and-hold-and-hold strategy. Mutual funds simply avoid the complexity of trading for those who do not have the experience and knowledge required to avoid securities trading potholes. Only when a person is an experienced trader and wishes to implement their long-term investment using ETFs would ETFs be another, equivalent quality choice compared to low cost index mutual funds.
The promotion and lure of ETFs will always be out there. More detailed ETF information is provided in a subsequent chapter for those who wish to use ETFs. That ETF information might indicate to most investors why they are really not “missing out” on much, if they choose to use good old boring index mutual funds, as the exclusive vehicle to implement a passive, long-term buy-and-hold-and-hold investment strategy.
There is also no reason to purchase most low cost mutual funds through any broker, even a discount broker. When you can buy mutual funds directly from a low cost fund company, you can usually avoid all transaction charges. Putting even a discount broker in the middle is unnecessary and adds to your costs. Therefore, the primary reason to have a discount brokerage account would be if you chose also to purchase and to hold ETFs.
Use discount brokers to purchase ETFs
If you chose to use ETFs in your investment portfolio, I suggest that you set up an account with one of the major discount brokers. There is no reason to pay the much higher fees of “full-service” brokers. Some of the major discount brokers are E*Trade, Fidelity, Schwab, and TD Ameritrade.
Note that just because elsewhere I have mentioned how unimpressed I am with E*Trade’s spokes-baby advertising, this does not disqualify E*Trade as a viable discount broker. It just means that E*Trade’s advertising trivializes trading. This “even babies could trade” promotion insults those who understand that securities trading is anything but simple. Simultaneously, it misleads others to believe that they can and should trade securities without knowledge or sophistication. This is rubbish, and it is potentially harmful.
Understand discount broker services and fees before selecting one of them. In addition, you should understand how they handle ETF dividends. One thing to note about ETFs is that you do not want to buy and sell small positions of hundreds of dollars, because then even low transactions commissions can significantly reduce your assets through numerous, albeit smaller, brokerage transactions.
Finally, understand how to place orders, and avoid placing market orders and other kinds of orders that would convert to market orders. Occasionally, market orders can be filled at prices that are very different from what you expect. Since you should understand that there is no virtue in frequent trading, hopefully you will commit to be a long-term buy-and-hold investor. Therefore, your ETF transactions would be highly infrequent.
Although you are trading through a discount broker, even $10 trades are very costly from a dollar percentage standpoint (and time standpoint), if you trade frequently and in under $1,000 trade sizes. If your trade sizes are larger and infrequent, then the trading cost is much less important. However, since you would trade larger amounts much less frequently, you should ensure that the orders you place would trade near the then-current market price. Again, if any of this is not clear, then just buy low cost, broadly diversified mutual funds directly from mutual fund companies that deal with the public.
Buy mutual funds from companies doing business directly with the public
You can invest directly in certain mutual funds by downloading forms from the fund company websites, completing them, and mailing them with a check as payment or with payment instructions for the fund company to transfer your assets from elsewhere. Otherwise, you can call the mutual fund company for guidance on how to open and fund an account.
Note that most mutual fund companies do not allow direct investments by individual investor and only work directly with financial advisors. Such advisor-only fund families should be avoided.
In my experience, I have found that the telephone personnel of Vanguard, Fidelity, and other mutual fund companies that sell directly to the public have been helpful and competent.
If you need help from a human being, when you call a mutual fund company, I have found a trick is to get through most automated telephone answering systems. Often I just say “representative” repeatedly and loudly, until the telephone answering software gives up and transfers me to a human. Remember, you are not being impolite, since you are just raising your voice to a machine.
Next, the trick is to be transferred to the right department, so immediately summarize what you need for whomever you get on the phone. Then, ask with whom you should be speaking and whether you need to be transferred.
In particular, for tax-advantaged retirement accounts you will want to reach the department that specializes in these accounts. Their personnel deal with the specialized retirement account matters every day, and all but their newest personnel tend to know how to handle almost any question that you might have. They can answer your questions, mail the correct forms to you to fill out, and/or direct you to the correct forms online to download, complete, and return.
If you tell the mutual fund personnel of the retirement accounts department that you want to do a tax-free retirement plan rollover, these personnel should be able to smooth the way for you. All you should have to do is to complete the correct paperwork, and they will handle the funds transfers for you. To avoid current taxes and penalties, you should never take interim possession of any of your tax-advantaged rollover assets. All transfers should be direct custodian-to-custodian transfers.
Of course, once you get connected to the correct department make sure that you take notes about your conversation. If you think that you may need to call back again before you complete your transaction, ask whether there is a direct dial 800, 877, 866 or whatever toll-free number directly into that department. Also, make sure that you get the name of the person with whom you are speaking, including employee extension or employee number, in case you have to call back and do not want to have to restart a conversation with another person. Finally, if you approve any kind of telephone transaction, always ask for and record the transaction or confirmation number for possible future reference.
Finally be aware of the questions you are asking. If you know what you want to do, and you are calling to get information about how to get it done, make sure the you get to someone in a department that understands what you want to do and can answer your questions. Then, focus on questions about how to get it done. If you begin to ask questions about “whether” you should do something, then your questions are moving toward the realm of financial advice. Some “whether” questions can be technical in nature and the mutual fund representative can present your choices and may even refer you some of the firm’s documents for a presentation of the details.
However, if your questions indicate that you really do not know what you want, you might be transferred to the advisory department. Even the low cost index mutual fund companies have financial advisory departments. If you find yourself talking to someone in the advisory department, first ask the person how he or she is compensated. “I work on salary, and I have no financial interest in what I tell you,” is the answer you should strongly prefer to hear. This advisor might be helpful in your decision as to what to do and how to do it. However, if you want to get something specific done; you are relatively self-sufficient; you only have specific questions; and you want to get it done quickly, then you do not need to talk to a mutual fund financial adviser. Instead, you probably need general telephone personnel or a departmental specialist to guide you through the transaction.
