Better than burying my savings in the backyard

October 16, 2012 11:40 AM

What do I need to know about hiring a stock broker or financial advisor?

For a while now I've wanted to invest some money for the future, but I've found "investing" to be complex and jargony. I don't want to sink a lot of time into learning the system and the language, I'd rather let someone experienced handle it for me so I can focus on other things. Here are a few questions I've thought of... I'm a complete novice so feel free to volunteer other info I don't know I need. ;-)

1. Financial advisor? Stock broker? What should I look for in Washington state? I don't care if the money goes to the stock market or other places, as long as the investments are relatively low-risk and diversified.

2. I don't have much money to start with. Is there a baseline "small amount" I can bring without insulting the advisor? I don't want to reveal my cluelessness ("what can you do with $5.00?") and get laughed out of the office.

3. At a basic level, what can I expect? Do I drop off my money, let the advisor work some magic, and come back in a year to see if it multiplied? Or is it more hands-on, where I'm getting updates every week? Does the advisor make buy/sell decisions on my behalf, or am I required to explicitly approve each action? I'd prefer to stay hands-off and trust the expert's judgment about stuff like that.

4. More generally, is this even a good idea? If not, how would you recommend someone prepare fiscally for the future if he's not particularly knowledgeable or interested in the world of finance? What pitfalls should I avoid?

posted by The Winsome Parker Lewis to work & money (8 answers total)

Oops, I forgot to add: How much commission should I expect to pay the broker or advisor, and what sort of fees should I be aware of before beginning?
posted by The Winsome Parker Lewis at 11:41 AM on October 16, 2012

Stock broker is kind of an obsoleted thing. It's from the days when you called someone to buy some shares of stock, now you just do it on your computer. So yes, you are looking for a financial advisor.
posted by smackfu at 11:46 AM on October 16, 2012

1st. You should expect to pay 0 commission. You should never ever deal with a commission based financial consultant. Pay for services, sure, but never pay a commission. Now don't get that confused with paying a front-loaded fee to buy certain mutual funds, but even there you should be able to buy the no-load equivalent.

A financial consultant ( let's use Ameriprise as an example) will charge you between $300 and $600 one time to do a full financial analysis. He/She will make suggestions on Mutual funds, REITS, Annuities ( AVOID Annuities), and insurance. He/she will include a variety of options, some of which will be front-loaded, and exclusive to Ameriprise ( or Fidelity or Edward Jones, or whomever you are working with), but should also offer advise on other products. He/she will hand you piles of analysis and talk of Beta and Basis points and 3 and 5 year returns and Morningstar ratings and a million other buzzwords. The thing to do is DON"T PANIC. Take it all home and start reading and researching. A little knowledge will go a long way.
posted by Gungho at 12:12 PM on October 16, 2012 [2 favorites]

Scott Adams, creator of "Dilbert," wrote a useful nine-point plan that goes as follows, and works pretty well for 95% of people:


Do these steps in the order shown…
1. Make a will

2. Pay off your credit cards

3. Get term life insurance if you have a family to support

4. Fund your 401k to the maximum

5. Fund your IRA to the maximum

6. Buy a house if you want to live in a house and can afford it

7. Put six months worth of expenses in a money-market account

8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement

9. If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio
posted by Clambone at 12:29 PM on October 16, 2012 [4 favorites]

This is not rocket science. You do not necessarily need a financial adviser. You do need to do some reading. And to strengthen a point above: Never, never pay a front end load for a mutual fund - a no load version of the fund exists and the person trying to sell you such a fund is not looking our for your best interest. (A front end load means they will take a percentage of your money before it even gets invested - often this forms the basis of a commission to the seller)

For small amounts of money, a reasonable expectation on growth and a reasonably conservative risk profile you can do everything yourself with little or no fees. Investing with an adviser might give you piece of mind, but you will pay for it either up front as suggested above or in a yearly fee expressed as a % of your total holdings.

If you decide to go it alone - read some of the books by John Bogle..I'm sure others will chime in with good books.

In my opinion, mutual funds and ETFs are the keys to investing small amounts of money. There are many different mutual fund families. Vanguard provides many low expense ratio (fee) funds. Index funds which simply invest in an index (Dow, S&P 500, etc - the things you hear on the news) have exceptionally low expenses since they are not actively managed. For a mutual fund, you pick the fund and send them a check - some companies allow automatic monthly contributions as well. You will get a monthly statement just like a bank account.

For ETFs, the yearly fees are even lower but you would need to get a brokerage account since they are traded like stocks. You can get a brokerage account at the usual suspects (vanguard, fidelity, etc...) But if you are just learning, I would make this phase 2 after you feel comfortable with mutual funds...

One last note, if you do get an adviser - learn as much from them as you can and spend the first couple years learning about investing. After you are more comfortable come back to the question and ask what you are getting for the % they are taking from the top each year.
posted by NoDef at 12:33 PM on October 16, 2012

If you hire a financial advisor, do it on a "fixed fee" basis only. Be careful about being steered into investments for which the advisor gets a commission from the fund company (such things are often opaque and you really have to dig to realize they are even there). Be skeptical about claims that you can do better with a financial advisor than investing on your own in low cost highly diversified products such Vanguard and Fidelity index funds and ETFs. Read books like The Big Investment Lie so you can understand that the investment industry does a lot of marketing that makes people like you feel they can't invest on their own. Don't get into a speculative/gambling mentality of trying to pick individual stocks, trading options and commodities, etc.
posted by Dansaman at 12:33 PM on October 16, 2012

You may also want to check out the Bogleheads forum.
posted by Nothlit at 1:03 PM on October 16, 2012 [2 favorites]

Building on Nothlit's comment, I have found The Boglehead's guide to retirement planning to be very helpful and easy to read. I copied that link from the bogleheads page, so if there's a commission involved, I'm not getting it.
posted by verdeluz at 2:37 PM on October 16, 2012