Should you buy your mutual funds directly from a mutual fund company or should you buy them through a custodian like TD Ameritrade or Fidelity? Does it matter?
As you’ll see, it matters a great deal. In fact, where you buy your funds might be one of the most important decisions of your investing career. Here’s a question I received recently that drew my attention to this important topic:
Do you recommend opening a Roth IRA account with a mutual fund company or going through a discount brokerage? Everything I read seems to suggest a mutual fund is the route to take, but my dad keeps encourage me to use a custodian, so I am conflicted
This particular situation is a little muddy because it involves a retirement account. That’s OK. Let me walk you through my thinking on this topic and let’s see if that helps you make a better decision yourself.
The Benefits Of Buying Funds Through A Mutual Fund Company
It’s easy to buy funds through a fund company. All you have to do is call them up or go to their website, complete a few documents and deposit your money. In most cases, you won’t incur any processing or account fees – even for retirement accounts.
Once you go through this process, you’ll be able to invest in any fund the company offers. Later on, if you want to make a change you can switch funds (usually for free) to any other fund the company has on its menu. It’s very simple, quick and inexpensive.
The Drawbacks of Buying Funds Through A Mutual Fund Company
There are two major drawbacks to this approach. First, the mutual fund company will only sell you a fund they manage. That’s very limiting. If you open an account with Vanguard for example you can only buy Vanguard funds.
If you decide that you no longer want the Vanguard fund but instead want a fund offered by another company you’ll have to sell your Vanguard fund, open up another account at the new company, transfer your money and then buy that new fund. Sounds like a lot of work….doesn’t it? It is a lot of work. And that leads us to the second problem.
Not only is it tough to move money around, it’s also a pain to manage your money if you have lots of accounts all over town. For example, if you want to own 4 different funds from 4 different companies, you have to have 4 different accounts.
If you want to diversify both your IRA and your individual account, you need 8 accounts – 4 for the IRA and 4 for the individual. Ugly.
The beauty of opening up an account at a custodian is that all this hard work goes away. Most of the larger custodians offer thousands of funds. And you can buy and sell many of these funds without paying any transaction fees.
That makes it easy for you to buy and sell for free without creating a logistical nightmare for yourself. Happy Pilgrim.
In the old days, custodians used to charge you fees for retirement accounts. That was the reason many people opened up accounts directly with the funds. But as I said, today most custodians open up accounts for you without charging you for it too – including retirement accounts.
Mutual fund companies love it when you open up an account with them because your money becomes captive. Don’t fall for their evil tricks. Keep your life simple and use custodians to make your investments.
Do you use mutual fund families to house your accounts? Why?