What are the advantages and disadvantages of opening an investment account directly with a fund company?
I'm considering opening an individual account as my emergency fund using a balanced investment strategy. Should I choose to open the account directly with the fund company, like American Funds. or go with a retail account through an advisor?
Great question, there are pros and cons of available options: Purchasing Direct: Pro's: Fund companies will often waive minimum investment requirements and transaction fees if you are setting up a recurring deposit. They may also allow you to exchange one fund for another fund within that company for no transaction fee. Con's: If you open your account directly with American Funds or another fund family, you will be limited to investing in their mutual funds. Direct registration accounts like these are often in the "Investor" or "Retail" share classes that carry higher internal expenses than other share classes. Retail Brokerage Account: Pro's: Many brokerage custodians have an open platform allowing you to invest your money in any mutual fund available to the individual investor. You can also invest in ETF's, which trade like stocks but are baskets of securities like a mutual fund; the benefit would be lower internal expenses. Con's: Brokerage firms get their revenue from when their clients buy and sell securities. Mutual fund transactions typically cost the retail investor $20-50 for each buy and sell. If you are starting with a small amount of money, this can eat into your investment. Through an Advisor: Pro's: Whether your advisor works for a brokerage firm or is an independent advisor, they may have access to institutional share class mutual funds. These carry much lower internal expenses. Advisors are also great resources as they provide guidance in selecting your investments and many also provide financial planning services to help out in other areas of your financial picture. Con's: Advisors are a cost. Whether your advisor is paid on commission by selling you mutual funds or other investment products, or is paid on a fee-basis, they are an expense. Many investors, as their financial situation and investment portfolio become larger and more complex choose to work with an advisor as the costs of the advisor tends to drop as the portfolio size increases. Bottom line, if you really like a specific fund or fund family, direct registration is a great way to get started investing. If your goal is to own funds or ETF's from other providers, brokerage might be a good route. If you are seeking guidance and an ongoing relationship and investment oversight, choose an advisor.
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