Roth IRA: Vanguard vs Free Advisor's Mutual Fund

Question

Background:

• I recently turned 25 and became applicable to invest into my employer's 401K. Due to no matching, I have 3% allocated in as a supplemental retirement fund.
• Currently single, rent (no intentions to buy soon), and have a stable job that isn't planned to change in the next few years.
• I have a recent car loan (5 years - 2.89%) and some student loans remaining (~7 years - about 6%). I fully understand the urgency to pay these off in far less time and will be capable of doing so even with these retirement accounts.
• Very little to no experience in terms of investing. Highly logical and can do the math, but terminology and best approaches are new to me.

Vanguard:
After reading through a few dozen threads on Vanguard, it sounds like they're up there on one of the best hands-off retirement accounts. It seems like I could open a Roth IRA with them and set a Target Retirement Fund and be done. I plan on maxing my Roth IRA yearly, so I know starting early is the best way to do so. The problem is knowing if this is considered too good to be true.

Advisor:
I went to a financial advisor through a nearby bank (services a few states). He suggested setting up a mutual fund with American Funds and that would probably return 7% over the long run. He went through charts/data and such, but all I could pull in was yearly percentages since that's all I know. I understood any ups and downs and how they're all a part of the end goal on hitting a 'good' average. Ultimately, it just felt like everything he said was generic and wasn't more than their 'filler' suggestions.

Questions:

• Between Vanguard and the advisor, are there any concerns with choosing one over the other?
• Wouldn't Vanguard (or other online ones (Fidelity?)) be a better approach because of its background and the fact that the advisor doesn't (?) gain anything if my money does well or not?

I'm simply trying to see if that 'free' advisor would be beneficial at all. There's probably a good reason why he never was like "Have you looked into online Roth IRAs?"

Personal follow-up:
I sincerely appreciate every bit of advice that has been provided over the past few days. I've decided to lock into a Vanguard Roth IRA and shut down communication with the advisor I talked with. The Internet is a wonderful place where one's 'basic' advice can help shape another's future. Thank you, greatly!

Answer 1

American Funds?

Also look at their annual expenses.

And this is from the AMCAP fund, a "growth fund" in their offering, the expenses over 10 years for a $10,000 investment:

To put this in perspective, my 401(k) uses Vanguard, and for their S&P fund, VIIIX, offered only to large companies. It has a .02% expense. On $10,000, that's $2 per year. (1% would be $100, .1% $10, so yes $2/yr) Now, it's not readily available to the public, so I recommend VOO, the ETF by Vanguard that charges .05% or $5 per $10,000.

This guy would put you in a fund that will cost you over $1300 (On $10K invested, a 13% hit) in 10 year's time. My advice? $50. (Actually, $80 or so, as we need to assume growth in the account.)

This family of funds and this 'financial advisor' are the people we've been warning you about. A PBS Frontline Episode titled The Retirement Gamble discussed this in great detail, how these high cost funds are destroying the wealth of retirees. Jack Bogle, the founder of Vanguard is interviewed, and explains how these fees north of 1%/yr will eat up to half of one's savings over time.

In 30 years when your account is worth over $1M, you'll think about how you're spending $500/year in expenses instead of $12000/yr. And you'll think back to this day. (And, yes, sometimes free advice isn't worthless, but rather, priceless. Any questions? Just ask)

Answer 2

In your title you say free, but in the rest of the question you talk about how the adviser gains if you invest with their suggestion. Thus they are not free, they are paid based on successfully getting you to follow their suggestion and keep you following their advice.

Advisers can also be paid where they charge a flat or hourly fee to make a plan, and then they are out of the picture. If you follow their advice to the letter, or only in a general sense, or throw it in the trash it doesn't impact their future earnings.

The difference between the different types of fund families is where they get their customers. Given that many fund families have the same exact index funds, and similar target date funds; the big difference is fees and expenses. If a fund family requires you to go through a broker to invest in their fund, that is a layer of people that need to get paid.

When picking which family to invest with the number of fund types (US Stocks, bonds, international, indexes, target date, sector funds) can be very important. The IRA (Roth or regular) can be moved from fund to fund without tax consideration, moving within the fund family makes this transaction virtually seamless.

If you limit yourself to a fund family because of a suggestion made in 2015, why do you still want to be paying a fee to an outside company a decade later when you now have moved from a target date fund to some other fund within the family.

As to the generic filler advice you felt you received. Nobody has any idea in the next few years which segment of the market will do well. They can only discus the past and guesses about the future. That is why many advise either an index, or a target date fund. That wasn't bad advise. The problem was the steering you to a fund family that made the adviser the most money.

So take their advice about the type of investment (Roth vs regular);target vs index; and pick the fund family that you are comfortable with regarding fees, expenses and number of investments.