These days it’s easy to go it alone with personal finances and investing. Play with a few online calculators and some money management software, pick a few broad market index funds and, well, that’s it.
Going it alone is suitable for people with a do-it-yourself bent, have enough time and can live with setbacks, says Tom Warschauer, financial services professor at San Diego State University.
“If the answer to those questions is yes, go for it,” he says. “Discount brokerages with some artificial intelligence-type robo-advisors make it much easier.” Those are calculators that use your inputs — assets, income, age, financial goals and tolerance for risk, etc. — to recommend a mix of investments such as mutual funds of various types.
[See: 8 Stocks to Buy For a Starter Portfolio.]
For many people, though, financial management is daunting.
“If you’re not interested in considering tax-incentivized products, reweighting your portfolio, diversifying away from unintended concentrations in your portfolio or adjusting your investments over time as life changes and goals shift, then going it alone is a perfectly acceptable path,” says Min Zhang, chief financial officer of Totum Wealth Management in Los Angeles. “However, most people still find comfort in engaging with a human and want to rest assured that an expert is managing their wealth, rather than letting the proverbial buck stop with oneself.”
Think about why you might need a pro. The more complicated your finances, and the less you know about saving, investing, budgeting, taxes and insurance, the better the odds professional advice will be worth the cost.
You can limit the cost by hiring one or more experts for just those things you really can’t do yourself. If you have a straightforward retirement savings plan at work but are overwhelmed by your tax return, hire a tax preparer, not a soup-to-nuts financial conglomerate.
Also, if you have investments, your brokerage or mutual fund company may offer free or inexpensive advice. And you may be entitled to some free help from the firm that provides your 401(k) or 403(b) at work, though that’s likely to be general education rather than advice tailored to your specific situation.
Then, if a paid pro seems essential, consider what type suits your needs. Advisors, of course, must be paid, and each approach has pros and cons:
Commission-based advisors. The system used by traditional stockbrokers charges a fee for each transaction such as a stock purchase or sale, and the fee pays for the recommendation. This can be inexpensive if you have very few transactions — if you buy a set of mutual funds and just hold them for retirement, for example. The danger is that an unscrupulous advisor may “churn” the account, pressing you to buy or sell more than necessary to boost commissions. Deep-discount brokers — the kind that charge just $5 or $10 a trade — typically don’t offer investment advice but are a good choice if you hire someone else to devise a strategy you will implement yourself.
Asset-based advisors. These advisors charge an annual fee, such 1 percent to 3 percent of the value of the assets under management. This is fine if you need lots of advice and trade frequently, but it can be expensive if most of your holdings use a buy-and-hold strategy that requires little guidance after investments are chosen.
“No one is worth more than 1 percent of assets under management,” Warschauer says.
[Read: 7 Stocks That Should Grow With Millennials.]
Fee-only advisors. These advisors charge a flat rate or hourly fee to give advice. This is a good option if you need help setting up a master plan that you could then implement yourself with a fund company or discount broker. It could get expensive if you need ongoing help. Note that some advisors use the “fee-only” label but actually employ an asset-based billing system.
Warschauer says it’s reasonable to pay 0.25 percent of assets involved for advice on an investment plan you will implement yourself using index mutual funds or exchange-traded funds, and 0.5 percent if you will use actively managed funds. One percent would be the maximum he’d advise paying for a full plan implemented by a pro.
Many experts say asking trusted friends, relatives or coworkers for referrals is the best way to find a good advisor, but that assumes the recommendation comes from someone who knows enough to gauge the advisor’s performance. Jeff Motske, president and CEO of Trilogy Financial in Huntington Beach, California, suggests getting referrals from professionals you already trust — a lawyer, tax preparer or accountant, for instance.
Financial advisors use an alphabet soup of professional designations. Most experts recommend using a certified financial planner, a designation with a broad range of education requirements covering many money-management concerns. For a fee-only advisor, use the referral service provided by the National Association of Personal Financial Advisors.
Also check with FIRNA and the Security and Exchange Commission to see that your candidate has not been disciplined or convicted of fraud.
“You can find a treasure trove of information on your prospect” by using those sources, says Matt Hylland, a financial planner with Hylland Capital Management in Virginia Beach, Virginia. “Initially, make sure they are indeed registered in your state. From here you can access the advisor’s history, which will show their education, exam history, work history, criminal past or if they have had any rule violations or complaints against them.”
Build a list of prospects, talk to each on the phone and then meet a few finalists in person. Anyone who charges for an initial consultation should be crossed off the list.
“If the advisor becomes irritated when asked detailed questions, this can be a red flag,” says John Bucsek, managing partner of New York-based MetLife Solutions Group. “This may be obvious, but in my experience, a patient advisor is normally a better advisor.”
Beware advisors who want authority to trade without your advance approval, or who pressure you to make quick decisions. Long-term financial strategy does not involve day trading.
Once you’ve settled on a few candidates, ask some questions face-to-face:
— What is the scope of your services? Retirement planning? Insurance? Saving for college? Budgeting? Estate planning?
— What do they cost?
— Are you accustomed to serving clients with issues, income and assets like mine?
— What will be our benchmark for gauging performance?
— What is your investment philosophy?
— How will you balance risk versus return?
— How accessible will you be? How often will we talk?
— Who will you use for specialized advice you don’t provide, like tax preparation or estate planning?
— Do you provide in-house products like mutual funds? How will I know you are not favoring those over other companies’ products that might be better? In what cases will you recommend an actively managed fund over a comparable index fund or ETF?
— Why are you interested in my business?
Ideally, you’ll have several suitable candidates, and the choice may boil down to convenience and chemistry.
[See: 8 of the Most Incredible Investments of the 21st Century.]
“You should do the talking and they should be listening and asking the right questions,” Motske says. “How do you know if they are the right questions? If they ask you about things you’ve never thought of before, that’s a good indicator.”
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