Investing in Fidelity PAS with zero fees

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Topic Author
Roly
Posts: 3
Joined: Fri Jun 26, 2020 9:32 am

Investing in Fidelity PAS with zero fees

Post by Roly » Fri Jun 26, 2020 10:15 am

We are maximizing 401K, Roth and HSA.

Next, instead of paying down our mortgage, we invested in a Fidelity Mutual Fund with a low expense ratio. The issue we are having is that every year we seem to be hit by a large tax bill on this particular fund when they rebalance. The fund is FIHFX. We have the option of switching this money into a Fidelity PAS account. We believe they will waive our fees, and we believe the PAS account will be more tax efficient than the Freedom Fund.

Questions -
1. Do you guys think this is a good idea? What should we be careful about?
2. We are also concerned about who will actually manage my account and how good of a job they will do. What happens if our good manager leaves the company and another one takes over the account. Do they have checks and balances, so we are safe?
3. Do you think we should pay attention to any particular timing when switching from the Mutual Fund to PAS. Not asking to predict the market but knowing that this can take a week, we were wondering if there any other things to be aware of timing wise.
4. Also, do you guys agree that with our mortgage rate at 2.625%, and 15 years left on it, that it is better to invest than to pay down? This question is purely from a financial standpoint, rather than for peace of mind.

Thank you very much!

mhalley
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Re: Investing in Fidelity PAS with zero fees

Post by mhalley » Fri Jun 26, 2020 12:06 pm

Why would they waive the fees? Even if they did, most likely they will put you in funds with much higher ER’s. The problem is having a tr fund in a taxable account. If there are not a ton of capital gains, switching to a 3 fund fidelity portfolio would be the answer, with perhaps using a muni bond fund depending on your tax bracket.
https://www.bogleheads.org/wiki/Three-fund_portfolio
I would not prepay a mortgage that has such a low rate.

sycamore
Posts: 628
Joined: Tue May 08, 2018 12:06 pm

Re: Investing in Fidelity PAS with zero fees

Post by sycamore » Fri Jun 26, 2020 12:25 pm

Note that last year Fidelity made some changes to their Fidelity Freedom Index Funds as discussed in a couple of threads:
viewtopic.php?f=10&t=302203
viewtopic.php?t=299021#p4923776

This led to higher turnover and presumably some higher than usual capital gains distributions. Not sure if we'd continue to see such big swings in turnover or such large distributions. Just FYI.

Back to your original questions...
I agree with mhalley's post above: switching to a 3 fund account would be better so you can optimize asset location.

Usually BHers would ask about your total portfolio assets so we could help put assets in the best locations. See viewtopic.php?f=1&t=6212 if you'd like to get more specific suggestions. Otherwise I'll just ask why you picked a Target Date fund for your taxable account? Did you need its level of bonds to help fulfill your portfolio's stocks / bonds asset allocation? Did you like the idea of an all-in-one fund? It's possible such a fund is still a good idea for you in taxable but it likely won't be optimal.

I can't speak to how well Fidelity PAS performs as I don't use them. I personally wouldn't spend the time on them. Even if I got fees waived, I'd prefer to DIY - how to pick investments is pretty straightforward once you have an Investment Portfolio Statement to help guide you. And BHers are happy to help :)

Regarding the mortgage, you do have a low rate so there doesn't seem to be any rush to pay it off sooner, though maybe you'd like the idea of living without debt (I did and do!).

tj
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Re: Investing in Fidelity PAS with zero fees

Post by tj » Fri Jun 26, 2020 1:00 pm

Never heard of fidelity pas. How does it compare to fidelity go and the hybrid?

Jack FFR1846
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Re: Investing in Fidelity PAS with zero fees

Post by Jack FFR1846 » Fri Jun 26, 2020 1:09 pm

Instead, why not simply put a stock fund or ETF into this account and do all of the US stock, international stock and bond funds to rebalance easily into only your tax advantaged accounts like 401k, IRA, Roth, etc.

And no, they're not going to waive fees. That's their bread and butter.
Bogle: Smart Beta is stupid

mhalley
Posts: 8298
Joined: Tue Nov 20, 2007 6:02 am

Re: Investing in Fidelity PAS with zero fees

Post by mhalley » Fri Jun 26, 2020 10:14 pm

Fidelity pas usually charges 1.5% from 50 up to 250k. They are actively managed according to Fidelity’s view of the economy.
We'll start by looking at your appetite for risk, your time horizon, and your overall financial situation. Then we'll suggest a diversified mix of investments that's appropriate for your long-term goals. As markets move and your goals change, we'll continually monitor the investments in your account, making adjustments as needed in an effort to ensure your account remains aligned with your strategy and your plan....

In managing your account, we seek to maximize returns for a given level of risk. As part of this effort, we pay close attention to the US business cycle and use our understanding of economic conditions to adjust the mix of investments in your account over time.
On the bright side, you are able to pick an index focused style.

https://www.fidelity.com/wealth-managem ... t-services

Topic Author
Roly
Posts: 3
Joined: Fri Jun 26, 2020 9:32 am

Re: Investing in Fidelity PAS with zero fees

Post by Roly » Tue Jun 30, 2020 9:10 am

Thank you all so much for responding.

I have zero knowledge on investments.

I had moved from my default target retirement fund/cash to FIHFX for my retirement accounts like 401K, etc because of low expense ratio. This was a better choice for me since I don't know how to pick funds or rebalance every year. A good friend had helped me with this.

Not knowing any better, I used the same fund for my savings account. Oops!

I would feel more comfortable with an index fund, mutual fund or whatever it is; or a PAS account with zero fees. What is better and can you help pick?

Thank you.

retired@50
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Location: Living in the U.S.A.

Re: Investing in Fidelity PAS with zero fees

Post by retired@50 » Tue Jun 30, 2020 10:44 am

Roly wrote:
Tue Jun 30, 2020 9:10 am
Thank you all so much for responding.

I have zero knowledge on investments.

I had moved from my default target retirement fund/cash to FIHFX for my retirement accounts like 401K, etc because of low expense ratio. This was a better choice for me since I don't know how to pick funds or rebalance every year. A good friend had helped me with this.

Not knowing any better, I used the same fund for my savings account. Oops!

I would feel more comfortable with an index fund, mutual fund or whatever it is; or a PAS account with zero fees. What is better and can you help pick?

Thank you.
Using a total stock market fund at Fidelity (FSKAX) would probably be more tax-efficient than the target date fund you're currently using. However, depending on how much you invest in the account, it might throw off your asset allocation and become too stock heavy. This could eventually require you to add a bond index fund in your 401k. Since we cannot see all your holdings and potential choices in all of your accounts it makes things difficult.

See this wiki page that discusses tax-efficient fund placement. https://www.bogleheads.org/wiki/Tax-eff ... _placement

Regards,
This is one person's opinion. Nothing more.

mhalley
Posts: 8298
Joined: Tue Nov 20, 2007 6:02 am

Re: Investing in Fidelity PAS with zero fees

Post by mhalley » Tue Jun 30, 2020 11:32 pm

The thing to do is to determine what you want your asset allocation to be, and then implement that across all your accounts. If you go with stock funds in the taxable account, you may eventually need to either change to a more conservative TR fund in the retirement accounts, or else add a bond fund to the retirement accounts or possibly to the taxable account. The main thing is you need to educate yourself. I would start with the wiki, then read some of the recommended books. Start with these wiki articles: (plus the tax effecient fund placement recommended above)
https://www.bogleheads.org/wiki/Getting_started
https://www.bogleheads.org/wiki/Asset_allocation
https://www.bogleheads.org/wiki/Asset_a ... e_accounts
https://www.bogleheads.org/wiki/Three-fund_portfolio
https://www.bogleheads.org/wiki/Investm ... _statement
https://www.bogleheads.org/wiki/Books:_ ... nd_reviews

Topic Author
Roly
Posts: 3
Joined: Fri Jun 26, 2020 9:32 am

Re: Investing in Fidelity PAS with zero fees

Post by Roly » Wed Jul 01, 2020 9:29 am

Asset allocation -
#1. 45% - retirement accounts, FIHFX
#2. 38% - retirement accounts, US Stock 58%, Foreign stock 26%, Bonds 13%, Short Term 2%
#3. 17% - taxable accounts. Currently FIHFX, wanting to move this to more tax-efficient.

Does that help? I have FSKAX available. If I move #3 to FSKAX, what other changes do I need to make? I need very simple all-in-one kind of solution.
Is Fidelity PAS a bad choice at zero fees, given my lack of education on investments?

Thank you. Appreciate it.

sycamore
Posts: 628
Joined: Tue May 08, 2018 12:06 pm

Re: Investing in Fidelity PAS with zero fees

Post by sycamore » Wed Jul 01, 2020 10:26 am

Roly wrote:
Wed Jul 01, 2020 9:29 am
Asset allocation -
#1. 45% - retirement accounts, FIHFX
#2. 38% - retirement accounts, US Stock 58%, Foreign stock 26%, Bonds 13%, Short Term 2%
#3. 17% - taxable accounts. Currently FIHFX, wanting to move this to more tax-efficient.

Does that help? I have FSKAX available. If I move #3 to FSKAX, what other changes do I need to make? I need very simple all-in-one kind of solution.
Is Fidelity PAS a bad choice at zero fees, given my lack of education on investments?

Thank you. Appreciate it.
Roly,

Your overall AA is about 53% US stocks, 30% Intl stocks, 15% US Bonds + short term, 2% Intl Bonds (I computed this using your account percentages listed above, but please double check me on that).

Assuming Fidelity PAS will waive their fees (there's some doubt about that - ask for their commitment in writing), they might be a good choice. I have no experience with an advisory service so I can't really say. One concern is that they'll make a recommendation you don't like, and you won't be sure if you're happy with them anymore. This kind of experience has been reported here on BH. I mention this to suggest there should be some kind of a commitment on your end, lest you end up second-guessing everything they do. Worst case you might have to sell some investments they suggested in your taxable account and thereby incur cap gains you don't want.

To manage it yourself:
1. sell FIHFX in taxable. I'm assuming you have gains on that investment (if you have some losses, there are some complexities involving a wash sale if you've bought the fund recently in your retirement accounts).
2. with the proceeds, put 60% into a Total US Stock Index fund and 40% into a Total International Index fund.

I did not list specific fund symbols to buy above because the entire purpose of getting out of FHIHX is to avoid funds that distribute capital gains. From what I can see, both FSKAX and FTIHX (Fidelity Total International) have distributed capital gains in the past.

This is where using ETFs are better than mutual funds because ETFs have a way of minimizing capital gains. I suggest either VTI or ITOT as a US Total Stock ETF, and VXUS or IXUS for a Total International Stock ETF.

Voila. It's not an all-in-one solution but just a couple of funds in taxable isn't too bad.

If you really want just a single fund in taxable, you could buy Vanguard World Stock ETF (ticket VT). I don't see that Fidelity offers a global stock fund, but it might be worth looking. Anyway, VT holds US and Intl stocks at "market weight". I don't know the current US vs Intl ratio but your current US/Intl AA is 65/35 which is not too far off from market weight.

Note that FIHFX is 15% fixed income so with step 2 above, you essentially moved ~2.5% of your portfolio (15% of 17%) out of fixed income into stocks. That's not a huge amount. But if you want to rebalance to your overall AA, just sell a bit of US Stock in your retirement account #2 and buy bonds. Or you can rebalance using any ongoing contributions you make (401k, IRA, or more taxable investing).

Hope that helps, let me know if you have questions.

retiredjg
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Re: Investing in Fidelity PAS with zero fees

Post by retiredjg » Wed Jul 01, 2020 11:08 am

The Fidelity Freedom 2035 Index fund you are holding in your taxable account is not tax-efficient because it contains taxable bonds. The bonds throw off dividends each year and these dividends are taxable no matter what you do with that money (spend it or reinvest it).

Whatever problem you are having with this fund has nothing to do with rebalancing.

The fund only contains about 15% bonds. If you are in a very low tax bracket, this amount of taxable dividends should not be much of a problem and the convenience of the target fund could be worth the cost of paying a little extra tax.

If you are in a very high tax bracket, there could be better choices for you than keeping that fund in a taxable account.

You keep mentioning you can get Fidelity PAS with no fee. I suppose this is not impossible but it seems highly unlikely. This is a service they sell people for a fee. Do you have some special relationship with Fidelity that would cause them to give you their services free? I suspect there is some kind of misunderstanding. Maybe some small fee somewhere is waived, but surely not the entire thing. Can you elaborate?

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