As retiring baby boomers pass the retirement savings baton to millennials, the investing industry is shifting to meet the demands of a new generation, with retainer and hourly fees gaining more momentum.
“It used to be about commissions so brokers would only get paid if you bought something,” says John Anderson, managing director and head of practice management solutions at SEI Advisor Network in Oaks, Pennsylvania. “The business evolved to a mix of commissions and fees for advice, but today we see lots of alternative models out there.”
That can make investing a complicated process. Think it of it as flying a plane, says Chad Willardson, president of Pacific Capital in Corona, California. “If you are off a few degrees in your flight map, you may not notice it at takeoff, but the closer you get to your destination (retirement), you will be far away from where you wanted to go,” Willardson says. “At that point, there’s no turning back.”
[See: Avoid These 8 Rookie Investing Mistakes.]
Your financial trajectory is less likely to be hurtled off course if you know the basics about the financial advice industry instead of falling for these common myths.
Myth 1: Investment advisors and financial planners are the same. Some financial planners are also investment advisors, but not always. “An investment advisor helps you decide what to invest in,” says Carla Dearing, CEO of SUM180, an online financial wellness service in Louisville, Kentucky. “A financial planner advises you on your entire financial picture with a holistic approach.”
For example, a financial planner can help you manage student loan or credit card debt, save for retirement, or determine how much house you can afford to buy. That can put you in a better position to make smarter long-term decisions to improve your investing strategy, Dearing says.
After the distinctions in title, it gets more complicated because not all advisors get paid the same way. For instance, fee-only advisors are registered investment advisors who have a fiduciary responsibility to act in their clients’ best interest because they get paid for giving advice and aren’t compensated based on product sales.
That’s very different from a fee-based advisor who earns commissions for selling various products. Keep in mind some advisors can also be hybrids — that is, both salesperson and a fiduciary advisor — because a broker-dealer may also be registered as an investment advisor representative, so do your homework. You can check a financial planner’s background with the Certified Financial Planner Board of Standards or by using BrokerCheck, an online tool from the Financial Industry Regulatory Authority.
Myth 2: You need to be wealthy. “Many people assume if they don’t have a lot of assets to invest, a financial planner can’t help them,” Dearing says. “How a financial planner can help you is less about your bank balance and chronological age, and more about your circumstances or the life transitions you’re experiencing.”
The wealthy can afford to make more mistakes than those who need every penny managed to maximum use, says Ilene Davis, a planner with Financial Independence Services in Cocoa, Florida, and author of “Wealthy by Choice: Choosing Your Way to a Wealthier Future.”
[See: 10 Tips for Couples and Young Families to Build Wealth.]
As for financial advisors, Anderson says there are many who work on a retainer or hourly basis to help younger clients who are getting started. The earlier you start, the better. “Most of the important financial decisions are made when we are younger,” Anderson says. That’s because debt management, allocating retirement assets, buying a house or starting a 529 college savings plan all have long-term financial implications.
“The myth that advisors are only focused on how much money you can invest may be accurate for some old-time traditional firms, but many newer, independent and technology-abled firms can provide an advisor no matter what your current situation is,” Anderson says.
Myth 3: All fees are transparent. Unfortunately, this isn’t the case, and determining the total cost you’ll pay as an investor can be complicated.
Instead, ask “what are my all-in fees for the advice and product,” says Fran Kinniry, head of portfolio construction for Vanguard Investment Strategy Group in Valley Forge, Pennsylvania. “How much am I paying for advice? What is my dollar-weighted product cost?”
For example, one company may charge 30 basis points for advice and 12 basis points to purchase a mutual fund or exchange-traded fund for an “all-in” price of 42 basis points, while another company might give advice for free but charge 55 basis points for a product.
To convert basis points into fees, know that 100 basis points equals 1 percent, with 10 basis points equaling one-tenth of 1 percent and one basis point equaling one one-hundredth of one percentage point or 0.01 percent.
Myth 4: Advisors can beat the market. One of the biggest misconceptions investors have is they think an advisor will help them outperform the market or know when to get them out of a bear market, Kinniry says. “That is really hard to do.”
Advisors know that chasing “the next best investment” rarely pays off, says Daren Blonski, principal at Enso Wealth Management in Sonoma, California. “Investors end up moving their money around and miss the benefit of having their money appreciate with expected market returns,” Blonski says. “The rule of thumb for successful investors should be invest in quality, low-cost, diversified investments and stay in for the long term.”
A financial advisor can act as your saving or behavior coach, he says, encouraging you to save more or helping you navigate volatile market swings, like those during the dot.com collapse or the global financial crisis, that might require staying the course.
[See: 13 Ways to Take the Emotions Out of Investing.]
“Many clients tell me that simply having an expert at their back defuses their anxiety and gives them the confidence to deal with their money,” something they put off doing for fear of making a mistake or being judged, Dearing says. “Knowing you have someone to help you course-correct, if needed, is hugely empowering.”
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4 Myths About Financial Advisors originally appeared on usnews.com
