One of these days, you may decide you need some help with your portfolio. If you like doing all your own investing and financial planning, that’s great. You may still want a second opinion. The larger your portfolio and the greater your net worth, the more sense it makes to consider getting help. Every investor has different needs, and every professional offers somewhat different services.
Whatever professional you need, one thing they all can do for you is eliminate procrastination in your financial plan. They can keep you accountable and even make decisions for you. The key question is whether you are better off financially with an advisor helping you. If you think you can do a better job, then try it yourself. Don’t be a complete island. Even the greatest do-it-yourselfers get second opinions.
The best place to start looking for an investment advisor is with friends. Find friends whose investment knowledge you respect the most, and ask whom those friends recommend. You can also talk to your CPA or tax preparer, if you use either; these folks see brokerage statements every year and know firsthand which advisors make money for clients. Watch your local newspaper for investment seminars and workshops in your area. Otherwise, you might have to resort to the Yellow Pages.
The most difficult question an investor will ever have to answer is, what kind of professional should I trust? This decision is usually the first one to make and often the least researched. Many people in my workshops ask me to explain the difference between fee-only investment advisors, investment advisors, money managers, brokers, and certified financial planners. The primary differences to be aware of, include the services offered, source of compensation, how are they influenced, and who regulates them.
The first and most widely known investment professional is the full-service investment broker (or simply broker). Other titles that describe a broker include registered representative, financial consultant, investment banker, and even vice president (usually awarded once certain levels of commission are achieved). Investment brokers are security salespeople who help investors buy and sell securities for a commission. Brokers seldom have fiduciary responsibility for client’s accounts, so the clients must be contacted prior to and must agree to any investment transaction. Some brokers may also offer financial planning, estate planning, and retirement planning services. Brokers are regulated by the Securities and Exchange Commission (SEC), your state’s securities department, and the National Association of Securities Dealers.
The primary advantage of using a full-service broker is the extensive research about investment decisions they can provide. However, many discount brokerage firms now offer similar research information. The full-service brokerage firm might have a team of security analysts, but they make mistakes, too. When selecting stocks and other securities, pay attention to facts, not the opinions of security analysts. With a little experience, your instincts may produce better results.
The primary disadvantage of working with a full-service broker involves the way they are compensated via commission for each investment purchase or sale you make. Commissions usually range from 1.5 percent charges on stock trades to 8.5 percent charges on mutual funds and other packaged products. Many investors feel commission-based investment advice is a conflict of interest. When you have any investment planning done by a broker, make sure you know the full extent of the commissions involved in every recommendation.
The second most popular type of investment professional is the registered investment advisor (RIA). Investment advisors are typically independent and have fiduciary responsibility for their clients’ portfolios, meaning they make the investment decisions on behalf of the client based upon the individual client’s objectives. Advisors are paid in one of three ways: fee-only (flat rate based on assets managed or time), commission (based on the amount of your purchase), and fee-based (a combination of fees and commissions).
What is a fee rate? Fees charged by RIAs usually range from 1 to 4 percent, depending upon the size of the account. The average fee rate is about 1 percent. If your portfolio is less than $250,000, expect to pay a higher rate of 1.6 percent, and if your portfolio exceeds $1 million, your fee should be 1 percent or lower. Remember, all fees are somewhat negotiable.