I‘ve received several emails recently about the topic of hiring an investment advisor. This is a very important question, and I suspect many wrestleg with this issue. Whether you’re just starting out and trying to figure out how to invest, or you’re nearing retirement with a decent nest egg, you may be thinking about this issue. And I don’t want to underestimate the importance of this issue.
Here are just two of the emails I’ve received from readers/listeners lately:
First, Deborah writes:
I’ve been reading your emails [weekly newsletters], and I’ve been enjoying what I’ve read so far.
As my husband quickly approaches retirement, I do have one question: How much money should a financial planner charge per hour or a percent of your portfolio? My husband and I are not accountants, but we have to face this money dilemma out of necessity. Thanks for your information.
The next email is from Timmy. Here’s just a snippet of what he wrote in a longer email:
If you were a 28-year-old in my shoes, would you go to a fee-only planner for advice, or just educate yourself and invest on your own?
There are reasons to reach out to certified financial planner other than to help you invest your money. You may need help with budgeting. You may need to figure out your insurance needs. You may just need someone to put together a long-term financial plan for you. For that kind of thing, you generally pay an hourly fee, or sometimes a flat fee, depending on how much you make or how detailed a plan you want.
A long time ago, my wife and I worked with a financial planner on an overall financial plan. If that’s the kind of thing you’re looking for, just find a certified financial planner who charges a reasonable hourly or flat fee. Here we are addressing whether to hire an advisor to manage your investments.
Why are you considering hiring an investment advisor?
The first question to ask is the most important–why? Consider these four reasons people hire financial advisors to manage their investments:
Can they learn these things on their own? Sure. Anyone reading this blog can learn how to invest. There are also some great books that explain investing in simple terms. But some people have more interest and confidence in learning it on their own than others.
Lack of Time: Another reason people hire an advisor is lack of time. You may be confident that you can learn to invest on your own, but you may be too busy. You’re working and spending time with family, and you just don’t have enough spare time to do this on your own.
I’ve heard this reason from many people. It’s not that you can’t find the information about investing, or that you’re afraid to do it on your own. It’s just not something you want to spend heavy amounts of time dealing with.
Fear of Missing Out: People also hire a financial advisor because of fear of missing out. People are afraid they’ll miss something or that they could do better with their investments. They’re afraid of missing some crucial information on asset allocation or which mutual fund to choose. And these people often think that financial advisors have access to all this information that will let them get more out of their money.
Many people experience this issue if they have a conservative portfolio. Last year, the S&P 500 was up 30%. Many people who abandoned stocks in 2008 felt they were missing out as the return on bonds fell far behind equities. I dealt with fears like these when I first started investing on my own.
Fear of Making a Mistake: The fourth reason people hire an advisor is fear of making a mistake. This is a little different than the fear of missing out. Some people are just afraid they’re going to make the wrong decisions. Maybe they think they’ll mess up their asset allocation, or pick mutual funds that turn out to be wrong for them.
These people are often paralyzed by the fact that there’s so much riding on their investments. After all, how you invest your money has a big impact on your family’s retirement and peace of mind. So this is an understandable fear.
When we break down the decision to invest on our own versus hiring a financial advisor, one or more of these factors comes into play: lack of information, lack of time, fear of missing out, or fear of making a mistake.
As you consider what’s best for you, it’s important to pinpoint why you think you should hire an advisor in the first place. As you do, consider the following:
Workplace retirement accounts: When you invest in a 401(k) or a 403(b) – a workplace retirement account – you probably invest without the guidance of an advisor.
My 401k, for example, is administered by Fidelity. I can get on the phone and call Fidelity. They’ll give me some general advice. But at the end of the day, I’m the one looking at those 30 investment options inside my 401(k) plan and deciding what percentage to allocate to each of the investments I choose to buy.
Small money, small risk: The second thing to consider, especially if you’re just starting out, is that you can start out slow. When you’re just entering the workforce and you’re just starting to invest in a 401(k) or an IRA or a taxable account, you’re probably not moving a couple of million dollars into your investments. You’re probably investing $100 to $1,000 each month.
That’s how I started with my first 401(k). The monthly contributions were small. My first taxable contributions to the Legg Mason Value Trust, a mutual fund that was managed by famed investor Bill Miller, was just $100 every month. These small, starting contributions gave me a great opportunity to make mistakes.
I made a lot of mistakes, particularly when I started investing in funds with a lot of fees. But I was investing relatively small dollar amounts. It’s one thing to make an investing mistake with $100 a month. It’s an entirely different story to make a mistake with $1 million.
So as you’re going through this journey, which is what learning to invest really is, you can take some confidence in the fact that you’re not investing a lot of money at the start. You have some room to learn as you go. This fact can help alleviate some of the fear that may otherwise prompt you to hire an investment advisor.
How much do fee-only advisors cost?
If you do decide to hire a financial advisor, how much does a fee-only advisor cost? The rule of thumb for fee-only advisors is that you’ll pay one percent of your invested assets annually. If you have $1 million under management, they’ll charge 1% of that amount. If your investments go up between now and next year, you’ll pay more next year. If they go down, you’ll pay less.
Keep in mind that an advisor’s fees aren’t directly based on performance. They get paid even if you lose money. You should be making money over the long term, of course, and the more money you make, the higher your fees will be. The advisor is getting 1% year in and year out, regardless of the performance of your investments.
And 1% is just a rule of thumb. The reality is that some advisors will cost you more, and some will cost you less. I’ve seen advisors who charge a lot more than 1%. Some charge 2% or more. Many also charge based on the size of your portfolio. The more you have invested with them, the lower the percentage-based fee.
Some are much more affordable. We had Rick Ferri on our podcast a while ago. He’s the founder of Portfolio Solutions. They charge a fee of 37 basis points. You need $500,000 to open an account with Portfolio Solutions, and you only get your fees down to 37 basis points once you have invested $1 million through the company (they have a minimum fee).
The key is to shop around.
What are the alternatives?
Even if you think you need some help with your investments, you don’t immediately need to go hire a fee-only investment advisor. Before you make this decision, you need to know what your options are. So here are two alternatives to hiring an advisor to manager your investments:
Online Investment Tools
The first alternative is a number of online investment options that can make investing easier. These companies leverage technology to create a way to help people invest their money. We talked about several of these options in the 31-Day Money Challenge.
Take Betterment, for instance. They sponsored the 31-Day Money Challenge. They make investing easier by giving you online tools to make it easy to pick the amount you want in stocks and the amount you want in bonds. Betterment then does the rest by investment your money in low cost stock and bond ETFs. Betterment also gives you plenty of tools to monitor how your investments are performing.
We’ve also highlighted Motif Investing. That’s another company that uses technology to make investing easier.
Yet another option is Personal Capital. I use this tool personally, and I think it’s fantastic. It’s a free tool, but they also offer advisory services to those who want to use them.
You still have things to think about with these tools. First of all, all of them cost money. (Personal Capital’s tools are free, but their advice is not.) The cost that these companies charge is over and above the expense ratios and transaction costs of the underlying investments.
You’re still basically paying for help. You’re paying money so that investing gets easier. Or in some cases, you’re actually paying for personalized advice that’s specific to your needs and situation. The more personalized the advice is, the more expensive it becomes.
What I like about these tools is that they offer a range of options. While some folks need more help, some don’t need as much. Some might want to invest basically on their own with a little advice here and there. Others may not want to do it alone, but also don’t need an advisor on the phone every day. Betterment and Motif Investing offer a good middle-ground approach.
(I’ve already interviewed folks from many of these services in my podcast. And I hope to reach out to interview people from all of them. Eventually, I’ll compile a post that highlights the services each company provides, how much those services cost, and other details.)
Mutual fund companies
This alternative is my personal favorite. Mutual fund companies like Vanguard or Fidelity will absolutely help you. If you’re going to roll over an IRA, particularly if it has a lot of money in it, they’ll help you decide how to invest it. They’ll walk you through all of it.
In fact, when a family member of mine was doing that, they asked for my advice. I get skittish about offering very specific, individual advice because I’m not a registered investment advisor or financial planner. I’m comfortable making those decisions for myself, but I’m just not comfortable making them for other people – even a close family member.
So I told this family member to go to Vanguard for some help. They wanted me in on the phone call, which was fine. So we called Vanguard, and the advisor there walked through the considerations and their recommendations on an appropriate asset allocation. If you like their recommendations, you can talk about the specific funds at Vanguard that are a good fit. The advisor walked my family member right through it all, at no charge. I’m confident that other mutual fund companies would do the same.
When we talk about hiring a financial advisor versus doing it on your own, understand that you never literally have to do it on your own. You can get help from Vanguard, Fidelity, or another mutual fund company; use some of the alternatives like Betterment or Motif Investing; or use a lower cost firm like Portfolio Solutions.
There are different levels of service and costs, and you should consider them all before you decide what’s best for you and your family. And no matter what investing decision you make, always consider the investment costs before you jump in.