Archives for May 2012

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How to Leave Your Broker

A reader writes in, asking:

“I have a few accounts with a broker at Edward Jones. He was recommended by a family member, and he hasn’t tried to cheat me in any way. But I don’t think the service I’m receiving is sufficient to justify the commissions I’m paying. Having read about Vanguard and index funds, I think that’s where I’m headed.

But I don’t actually know how to move my money. Do I just call my Jones guy and tell him I’m leaving? I don’t relish the thought of that conversation.”

To transfer an account from one brokerage firm to another, you don’t actually have to call your current advisor/broker first. In fact, you may not have to call him at all. And to the extent possible, I’d suggest avoiding it. The receiving brokerage firm (in this case, Vanguard) has an incentive to be as helpful as possible, whereas the company you’re leaving has an incentive to make things difficult and/or give you a sales pitch to get you to stay.

What you’ll want to do is originate the process at the receiving brokerage firm. Either open an account online (choosing during the application process that you have an account you want to transfer over), or give them a call and explain what you want to do.

The receiving brokerage firm will give you the appropriate paperwork to sign. Once you sign it and send it back in, they forward it to your old brokerage firm and handle the process from there.

Getting a Medallion/Signature Guarantee

Some brokerage firms (including Edward Jones) will require a “signature guarantee” (sometimes called a “medallion guarantee”). This is not the same thing as having your signature notarized, as it has to be done by certain employees of a financial institution such as a bank or brokerage firm. Most places will only provide a signature guarantee if you have an account with them, but I’ve heard of some credit unions offering to do it for anybody.

Before heading to your bank, I would suggest that you call ahead, because it’s often the case that only a certain manager can provide a signature guarantee, and you wouldn’t want to make the trip only to learn that the right person isn’t at work that day.

Transfer “In Kind” or Liquidate Everything First?

As part of the transfer process, the receiving brokerage firm will typically ask if you want to:

  1. Bring things over “in kind,” or
  2. Have your old brokerage firm liquidate everything and send it over as cash.

If the account is an IRA and there are no fees to sell any of the holdings, it’s probably simplest to have everything liquidated and moved over as cash.

Conversely, if the account is an IRA and there will be fees to sell any of the holdings, it’s usually best to compare the cost at each brokerage firm and do it wherever it will be less expensive.

Finally, if you’re transferring a taxable account, you’ll probably want to bring things over “in kind,” because liquidating everything would result in capital gains/losses. After everything is transfered over, you can go through the holdings one by one to see which ones should be sold immediately, which ones should be sold later (after a short-term capital gain has become a long-term capital gain, for instance), and which ones should be kept.

Do I Need Emerging Markets Stocks?

A reader writes in, asking:

“I currently own Fidelity’s Spartan International Index Fund. I only recently realized that the fund doesn’t own any emerging markets stocks at all. I realized this because I just learned about Fidelity’s new international fund, Spartan Global ex U.S. which does include emerging markets.

Should I switch to the Global ex U.S. fund? Or should I forget about it?

I’m retired and consider myself risk-averse.”

To put it as concisely as possible: It probably doesn’t matter very much.

As a general principle, it usually is beneficial to be as broadly diversified as possible with regard to one’s stock holdings. So, all else being equal, I’d usually be inclined to use the fund that includes an allocation to emerging markets.

But, in this case, all else isn’t equal. This may change in the future, but for the moment, the new Spartan Global ex U.S. fund is slightly more expensive than the Spartan International Index fund: 0.24% expense ratio as compared to 0.11%, according to Morningstar.

Admittedly, that’s not a large difference. But neither is the difference in allocation that you get for the additional cost. According to Morningstar, Fidelity’s Spartan Global ex U.S. fund only has 16.2% of its portfolio invested in emerging markets. (For anyone curious, Vanguard’s Total International Stock Index Fund also has 16.2% in emerging markets.)

If, say, 18% of your portfolio is invested in international stocks (30% of the stocks in a 60/40 stock/bond allocation, perhaps), that would mean we’re only taking about changing 2.9% of your total portfolio (16.2% of 18%). And the change isn’t even from stocks to bonds (or vice versa). It’s from one type of stocks to another type of stocks.

[Side note: Even if we change the assumptions to represent an aggressive investor with a 100%-stock portfolio, half of which is international, we’d still be talking about just over 8% of the portfolio.]

In other words, it’s probably not something you have to worry a great deal about one way or the other.

To give an idea of how similar two such funds can be, here’s the performance of Vanguard Total International Stock Index Fund (with its ~16% emerging markets allocation) as compared to the performance of Fidelity’s Spartan International Index Fund (with 0% emerging markets) from 12/15/2010 (when the Vanguard fund changed to its current index) to 5/3/2012.

It’s the kind of difference that most investors probably wouldn’t even notice — especially if the international allocation is a fairly small part of the overall portfolio.

In short: You can pay slightly more in order to get a slightly more diversified allocation. Or not.

SIPC: What It Covers and Coverage Limits

Monday’s post about mutual fund safety brought up a few reader questions regarding SIPC coverage — both general questions about what it covers and questions about how the limits apply when you have multiple accounts with one brokerage.

What Does the SIPC Do?

When a brokerage firm fails, the Securities Investor Protection Corporation (SIPC) steps in to make sure that all the securities that the brokerage firm purportedly held are in fact present. If customer assets are missing (e.g., the brokerage firm reported that a customer owned 500 shares of XYZ, but the brokerage firm did not actually have the shares), the SIPC takes action to restore customer assets, up to a limit.

To be clear: SIPC does not protect investors against loss due to a decline in the value of their investments. Rather, SIPC protects investors against their securities being stolen by a broker or lost when a brokerage firm fails.

Also, as mentioned in Monday’s post, when it comes to mutual funds, SIPC coverage does not apply when you hold the shares directly at the fund company. It only applies if you hold shares of a mutual fund at an SIPC-member brokerage firm. For example:

  1. You buy 100 shares of Vanguard Total Stock Market Index Fund in a Vanguard mutual fund account. (SIPC coverage does not apply.)
  2. You buy 100 shares of Vanguard Total Stock Market Index Fund in a brokerage account at E*Trade. (SIPC coverage does apply — it assures you that you do actually have 100 shares of the fund.)

Please note, however, that SIPC coverage doesn’t make option #2 safer than option #1. It simply makes it as safe as option #1 by removing the risk of funny business on the part of E*Trade.

SIPC Coverage Limits

SIPC coverage, however, has a limit. It’s capped at $500,000 per customer, with an exception of cash holdings, for which the limit is $250,000.

But many investors with portfolios north of $500,000 still don’t have to worry, because, as stated in the SIPC Series 100 Rules, “Accounts held by a customer in different capacities, as specified by these rules, will be deemed to be accounts of ‘separate’ customers.” A quick phone call to SIPC confirmed that this means there would be $500,000 of coverage for each of the following:

  • Your taxable brokerage account,
  • Your traditional IRA,
  • Your Roth IRA,
  • Your spouse’s taxable brokerage account,
  • Your spouse’s traditional IRA,
  • Your spouse’s Roth IRA,
  • A taxable brokerage account that you and your spouse own jointly, and
  • An account set up for your trust.

In other words, in some cases, a family can have SIPC protection of a few million dollars without having to hold assets at a second brokerage firm.

Note, however, that having two different accounts of the same type wouldn’t increase the coverage limit. For example, if a given brokerage firm let you have two Roth IRAs with them, you would not have $500,000 of coverage for each. The $500,000 limit would be for the two accounts combined, because both accounts are owned in the same capacity.

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