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I recently changed jobs and have a sizable sum in my old employer's 401k plan. It's doing fine but there are quite a few fees and I would prefer to roll it over. I'm considering two options.

First, my financial advisor is trying to talk me into letting him roll it over and manage it. The cost seems steep to me, 1.5% of my account value yearly. He claims they easily make that 1.5% up by out-performing the market, but it seems a little fishy to me. Is a flat 1.5% of the total account value a high/low/about average cost this?

My other option is to go with Vanguard and handle everything myself. I'm not interested in spending a lot of time on it; just get diversified and adjust myself every year or so.

Thoughts or advice?

TLDR
Use a financial advisor to rollover and manage a 401k plan for a flat 1.5% account value fee or do it all myself?

Follow-up
I ended up doing the roll-over through Vanguard. It was a very painless process. Vanguard made everything very easy so I opened a brokerage account as well :). Thanks for the help!

  • Is the 1.5% in addition to fund expenses? Also, it helps to think of what the fee is in terms of your long term, inflation adjusted, estimated gains. 1.5% of account value may be %15 - %20 percent of your gains. – James Roth Feb 25 '11 at 16:31
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    And the sad thing is that studies have shown that actively managed funds under-perform the overall market by the margin of their commission. So you'd be aiming for 1.5% below the market each year.. that certainly sucks, and adds up over time. Super easy to buy a few index funds & do it yourself. – Ceberon Feb 25 '11 at 18:32
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    If he could definitely make up the 1.5% per annum, he would not be a financial advisor. – jason Feb 25 '11 at 19:01
  • @ Ceberon: Check out this paper if interested. It explains the difference between actively managed funds that target benchmarks and ones that don't. Ones that don't (and instead rely on wholly quantitative methods) actually outperform the market consistently. – ely Feb 22 '12 at 17:50
  • My advice would have been the same as MoneyCone's highly upvoted (and deservedly so!) answer, but be aware that all mutual funds also charge a fee (as a percentage of the investment value) for taking care of your money. Fortunately, this fee is usually less than the 1.5% that your advisor wanted, but the expenses can eat up all the profits. Several money market funds did not pay any monthly dividends whatsoever for many months in the past few years because interest rates are low and they were unable to generate enough interest income to distribute after deducting their expenses. – Dilip Sarwate Feb 22 '12 at 20:35
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Call up vanguard and tell them you want to do a rollover. They walk you through the process. Spend some time on reading up on asset allocation and benefits of indexing.

1.5% every year is steep and what do you have in return? The advisor's word that he'll make it up. How much did he manage to return during the last lost decade?

It's a lose-win situation. He'll get his 1.5% no matter how the market does but that's not the deal you are getting.

Go with Vanguard. You are already thinking correctly - diversification, rebalancing, low cost!

  • Thanks for the help! As soon as I get 15 rep I'll come give you some upvote love. – codeConcussion Feb 25 '11 at 19:24
  • +1. If he beats the market by 1.5% you break even--that's very hard to overcome. – Phil Sandler Feb 25 '11 at 22:26
  • +1 -- You're better off paying a fee-only advisor a few hundred dollars once up-front to help you figure out your allocation and get a simple system set up. Even if you check back in with the fee-only advisor every year, this cost should be much lower than the 1.5%. Or for less than $100 at Amazon (or free at the library) and some reading time you can educate yourself. – bstpierre Feb 26 '11 at 1:31
  • +1 for vanguard. They have by far lowest fees. @codeConcussion Vanguard also has many "target retirement" funds. They rebalance for you in such a way they deem optimal for someone targeting a retirement in whatever particular year (just google it for further info). It's very low maintenance. – Clark Henry Oct 6 '14 at 7:02
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I thought the Finance Buff made a pretty solid argument for a financial advisor the other day: http://thefinancebuff.com/the-average-investor-should-use-an-investment-advisor-how-to-find-one.html

But 1.5% is too expensive. The blog post at Finance Buff suggests several alternatives. He also has the great suggestion to use Vanguard's cheap financial planning service if you go with Vanguard.

A lot of investing advice fails to consider the human factor. Sure it'd be great to rebalance exactly every 6 months and take precisely the amount of risk to theoretically maximize returns. But, yeah right. It's well-known that in the aggregate individual investors go to cash near market bottoms and then buy near market tops. It's not that they don't know the right thing to do necessarily, it's just that the emotional aspect is stronger than any of us expect. You shouldn't rely on sticking to your investments any more than you rely on sticking to your diet and exercise program ;-) the theoretically optimal solution is not the real-world-people-are-involved optimal solution.

My own blog post on this suggests a balanced fund rather than a financial advisor, but I think the right financial advisor could well be a better approach: http://blog.ometer.com/2010/11/10/take-risks-in-life-for-savings-choose-a-balanced-fund/

Anyway, I think people are too quick to think of the main risk as volatility, and to think of investing as simple. Sure in theory it is simple. But the main risk is yourself. Fear at market bottoms, greed at market tops, laziness the rest of the time... so there's potential value in taking yourself out of the picture. The human part is the part that isn't simple.

On whether to get a financial advisor in general (not just for investments), see also: What exactly can a financial advisor do for me, and is it worth the money?

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