Where to set up an initial ROTH IRA?

[Guest fsutaylor31]

I am looking towards setting up a ROTH IRA through Vanguard today. I like Vanguard because of their low fee index funds. This IRA I am setting up is going to be a bit more conservative, based solely on Index funds (haven't decided on ratios yet, but prob 80% SAP500 Index and 20% Total Bond Index).

I am an E-Trade customer, but I think I would rather set up a ROTH with the actual company I plan on investing through, rather than through E-Trade or another broker.

I think the advantage of an E-Trade is that you could probably play with your IRA money more aggressively by trading stocks with it easier. I think through Vanguard that are significant fees for trading stocks, rather than using their Mutual Funds.

Has anyone had any good experiences through discount brokers like E-Trade or others that they would recommend for setting up ROTH's?

Thanks - BT

[John G]

I have had experience with lots of brokers. They all have plusses and negatives. Things to consider: annual fees for IRA/Roth, options to waive the fee by asking or balance size or other business or automatic statements (Etrade waives fee if you use Email), convenience of a local branch, quality/readability of statements, range of investments available. The error rate across brokerages of fund families seems to be very small, under 1% and is not a factor in selecting. The bigger the assets, the less important minor fees become... so when you past the 50k level the annual fees are just not a big factor.

You are not likely to get Vanguard through another outlet, or if you do the fees will not be the lowest. Vanguard deals directly to keep costs down. Many mutual funds pay a fee to any broker that "sells" you the fund.... not the old style 6% commission, but a small service fee. Eliminate the broker and you can keep expenses lower is the theory that Vanguard uses.

Everyone should be aware that Fidelity has gotten tired of being undercut by Vanguard and now offers a series of Spartan mutual funds where if you initial purchase is over $10,000 the annual fee is 0.1%. Isn't competition wonderful. Vanguard has been a leader in low cost mutual funds for decades. Finally, a major fund house wants to take them on. I have been told that Etrade was something in the 0.09% range.... but I have not seen this in print yet.

There is nothing wrong with a index/bond split of 80/20, but if you are just getting started the first $3k can go anywhere and you can select another fund in later years. Your annual fees may be higher if you split up you assets into multiple funds.

One other caution, many funds have substantial overlaps in holdings. Just about every fund has some Microsoft, Intel, Home Depot. The bigger the fund, the more likely they have these holdings. If you have four funds but they substantially overlap, you are not really diversified. Stock index vs bond is virtually no overlap. Another way to minimize overlap is to choose by market cap (big, mid, small and micro are common designations) or growth vs value funds.

All of the above is dirrected to fund families and brokers connecting you to funds. I have assumed that you are primarily talking about NO LOAD funds - commissions are a problem both in terms of the bite they take and the incentive to sales persons to steer you to the place where they make the most money.

If you want to talk about stock brokerages for trading individual stocks, post again. There are many issues that are narrowly related to this activity: quality of execution, access to analyst reports, structure of commissions, ease of access, etc. I have used about a dozen different brokerages over the past 20 years. They come in all shapes, sizes and specialties. I don't just use internet discount brokers. I use different brokers for different types of trades.... some of the higher cost brokers are worth their extra expense, some are used only for special types of trades. One shoe does not fit all.

[dh003i]

Everyone should be aware that Fidelity has gotten tired of being undercut by Vanguard and now offers a series of Spartan mutual funds where if you initial purchase is over $10,000 the annual fee is 0.1%. Isn't competition wonderful. Vanguard has been a leader in low cost mutual funds for decades. Finally, a major fund house wants to take them on. I have been told that Etrade was something in the 0.09% range.... but I have not seen this in print yet.

Yep, the free market sure is wonderful. Though Fidelity hasn't quite caught up with Vanguard in the low-cost area yet (although they have other strengths that make them very competitive with anyone). Unfortunately, Vanguard and Fidelity don't play nice. Both companies have a funds network, but neither is in the other's "no transaction fee" segment; so, if you buy a Vanguard fund through Fidelity, there's an $75 fee (whereas if you buy a no-transaction-fee fund through Fidelity, there's no such fee).

One area where I think Vanguard is lacking a little bit in some areas is appealing to individuals with lower contribution limits. Many don't want to plop down a $10K investment in a mutual fund as the minimum initial investment.

[John G]

A reply to DH003:

Your statement that Vanguard requires $10k as a minimum initial investment is incorrect. For virtually all of Vanguards funds, the minimum is $1,000 for IRAs/Roths and $3,000 for standard taxable investment accounts. The only exception I know concerns Vanguard's health care fund where the minimum is $25k for all accounts. (This health care fund has booked an average annual gain of over 19% for the past 20 years, the holders are probably not complaining.)

I don't understand the "Vanguard and Fidelity don't play nice" comment. These are two of the big mutual fund houses in the US. You are talking Coke and Pepsi - two very large firms that are direct competitors. They each have over 100 funds that cover virtually every angle of investing.... value/growth, bond, L/M/S/micro cap, tax exempt, domestic/international. Since each has an offering in almost any conceivable area, I am not sure why they should offer access to other funds, much less encourage placement of funds with their number one competitor. Both firms have commented on how often investors become bewildered with the choosing from 8,000+ mutual funds. As consumers, we don't expect VISA to be "nice" and help us with transactions at Mastercard. At least I don't.

The trend in mutual funds has been to increase automation, expand NO LOAD offerings, expanded reporting, and skinnying down the annual expenses. Many decades ago most fund choices were fully loaded funds and annual expenses were hidden. Due to a combination of consumer pressure and SEC regulation, there is better communication, more competition and greater choice for funds. The recent issues with mutual funds have concerned in / out swings by institutional accounts and other favors for institutional customers. Greater transparency mandated by the SEC and demanded by consumers will eventually erase this problem.

Fund families have a huge economic incentive to play by reasonable rules. Those funds or families that diverge see a net migration of capital.

[dh003i]

I should have qualified that statement, and referred specifically to the funds I was talking about. Most of the funds I would consider investing in from Vanguard have 10K limits (energy, precious metals come to mind). Fidelity has a nice option with Roth IRA accounts where the account holder now doesn't have to meet the minimum, as long as (s)he makes regular contributions ($200 a month). As far as I know, Vanguard doesn't have such an option (though I expect that they will soon create such an option, to better compete for the low-income customer base). It is true, though, that most Vanguard funds do not have large initial investment requirements.

It is true that both companies have hundreds of funds; however, more choice (at less cost) is always better. There are various search-tools to help investors find the funds that are right for them, as well as representatives from the companies.