Help with finding a trustworthy financial advisor? (or way to pick investments intelligently)

January 4, 2006 10:02 AM

Ok - we bought the house. How should we invest the modest amount we have left over? Any good suggestions about financial advisors who don't charge lots in fees and only suggest investments that will bring them commissions?

My wife and I have been saving for years to buy our first house. We did that last year and we still have about 40k left over. We have three goals for this $ -
1. retirement (still about 30 years off)
2. our next house (this one is too small for kids so we'll probably need to buy another one in 5-7 years)
3. kids' college funds.

We need to keep a little of it (roughly 10k) liquid for house expenses (new roof, etc). I've looked at a lot of different investment sites and read some books, but I still feel like we could benefit a lot from talking to a good advisor. My concern is just that I won't be able to completely trust what the advisor says, or that we'll be paying her/him too much.

We're in Los Angeles, if that matters. Thanks.

posted by krudiger to work & money (15 comments total)

If it were me, I'd just keep saving up as usual, racking up more and more as time passes. Had you also considered nursing home expenses for elderly parents?
posted by vanoakenfold at 10:14 AM on January 4, 2006

How updated is your current house? If you're looking to move again, you might want to sink some money into improving the kitchen and bathrooms. It's supposed to be the quickest way to add value to your home.
posted by jrossi4r at 10:43 AM on January 4, 2006

Find an independent Certified Financial Planner in your area, and pay for a few hours of his or her time. Outline your goals and bring your financial statements; you should be able to come up with an investment strategy that takes into account your age, your resources, etc.

Presumably, you're going to want to save and invest until retirement in *addition* to doing something clever with this single lump sum, yes? Well, a few hundred dollars for a session with a CFP will be money well spent.
posted by enrevanche at 10:43 AM on January 4, 2006

Having bought my first home two years ago, I recommend you put aside *double* the amount you think you'll need for renovations, furniture and other unexpected "needs". However, you can put part of it in a high interest savings account and then ladder the remaining $10k in fixed interest investments, such as 1-year CDs. Apply for a line of credit, which you can tap if you need the money sooner than the CD expires. I would also recommend setting this up such that the money you have in liquid & short-term investments would meet your needs for up to six months of expenses should you lose your jobs.

If you've got a line of credit and money put aside, consider how much you need to buy your next home. Most financial people seem to want you to focus on retirement but, for us, our goal is to make sure we have 25% down for our next (much more expensive) home. This will make the next home affordable and provide a cushion against rising interest rates. If you're on track to have 25% against your *next* home and you can afford the mortgage payments on that home, then look at your retirement savings.

If you're able to save for your retirement, then look at college funds. No sense saving for college if you can't meet your own needs. Pay yourself first. If you've got that taken care of, go for the college fund.
posted by acoutu at 10:44 AM on January 4, 2006

I think you'd do better investing on your own, without a financial advisor.
Read up uon Roth IRAs. This would be where I would put about 20-25K of your money. Roths assume after-tax dollars, so no capital gains are charged on the IRA (unlike a tax-deferred 401K/'standard' IRA). This means your money can grow and when you retire you can withdraw this money without paying income tax on the gains (this is huge, btw). You can also "borrow" from a Roth or even withdraw in special circumstances without penalty.
After you've learned about how Roths are structured, read up on no-load mutual funds (Kiplinger's Personal Finance magazine, Money Magazine, and Motley Fool website are all good places to start). These funds are where you'll put that Roth money.
You say you want to keep about 10K for liquid expenses. Put that money to work for you in some "laddered" CDs (more research - the library is your friend) - you can make about 4.5% on CDs right now, which is way better than a savings account.
Lastly, if you want to really have some fun, take the last 5K and join an investment club. You'll learn a lot, probably make some money, and generally be a more confident investor as a result. The NAIC (National Association of Investment Clubs) is a good place to start.
Using this strategy you have a good chance at some very good gains, and very low expenses - which how to get your money to make money.
posted by dbmcd at 10:50 AM on January 4, 2006

Put the money into a CD for six months or so while you research what you really want to do with it. Look before you leap, make sure there are no major expenses you don't know about, read up on various investments, make educated decisions, interview and check references on any professionals you consider letting handle your money. In short, step back and breathe deep before doing anything else.

Oh, and congrats on the new house!
posted by ilsa at 11:23 AM on January 4, 2006

I'd also check real estate trends in your neighborhood. It might make sense to dump that $40K into either a) major home improvement or b) straight into the principal.

If your house is appreciating at a higher rate than some other investments, then the equity is nice to have, because you can always get to it through a home equity loan (whose interest is usually tax-deductible.)

On preview, Ilsa's advice is pretty good, too.
posted by TeamBilly at 12:02 PM on January 4, 2006

Financial advisors will help you with a number of things:

1) Setting goals and time horizons. What do you want to do with your money, and when? Are you saving for retirement, new house, kids' college, current expenditures? How long do you expect to hold onto your investments before liquidating them?

2) Assessing your risk tolerance. Are you willing to risk losing 25% of your investment if you might gain 25%? Are you OK watching a stock or fund lose 30% of its value 6 months after you buy it, confident that it will gain it back in the long run? Or would you rather invest in something that will not lose its principal.

3) Recommending classes of investment instruments. A good advisor can tell you the difference between an annuity, a CD, a mutual fund, a stock, a bond, and so forth - and which best matches your risk tolerance and time horizons.

4) Recommending particular investments. A good advisor can steer you towards particular stocks or funds that s/he thinks will be good performers, and away from ones they think will be poor performers.

5) Actively managing your accounts. You can also turn over control of your investments to someone else, and let them actively make decisions on where to invest and when to buy and sell particular stocks, bonds, or funds.

The question before you is whether you really need to pay someone to do these things for you.

You have already done #1 - determine your goals and time horizon. Good work. This is a tough step for most people.

You probably have already given some thought to #2, as its intimately connected to #1. If not, there are plenty of online calculators at financial institutions like Vanguard, Fidelity, and Schwab, that will allow you to get a good idea of how much risk you can tolerate. this might take you 30 minutes or so.

Now, do you really need someone to do #3-5? From your question, its clear that you have already done some research. If you are comfortable doing more web research and willing to take the responsibility for making decisions and keeping track of your finances, you can easily do these things for yourself. Its not child's play, but its not rocket science, either. Try looking at the Motley Fool website for starters; also look the "Planning and Education" section of the aforementioned Vanguard site.

It can't hurt to go to someone to explain what different classes of instruments are and what might be best for your goals (#3 & #4). But #5 in particular is something to stay away from, unless you have scads of cash and can afford a very very good financial planner. Active management is where commissions come in, and one of my (and many others') cardinal rules of investing is to keep commissions as low as possible.

I will refrain from giving you specific advice on what to do, because I don't really have enough information and IANAFP. But in general, you might want to base your investments around a broadly diversified portfolio of mutual funds (stock and bond), with some bonds or stocks if you have the tolerance for more risk.

In general, I would also not listen to advice given to you on the internet (including Ask MeFi) about particular stocks, funds, bonds, or investment instruments. Someone else might have struck gold with a CD or index funds or international funds - but that doesn't mean that you will, or that their strategy is appropriate for you and your goals. You need to figure out what your goals are and what you are most comfortable with. However, I will point you to a couple of other threads that contain some good general advice: here, here and here.

Good luck!
posted by googly at 12:24 PM on January 4, 2006

I would also recommend the forums (and the main site) at www.fool.com. Good info, helpful people.
posted by restless_nomad at 12:36 PM on January 4, 2006

You can also "borrow" from a Roth or even withdraw in special circumstances without penalty.

You can only contribute $4,000 a year to a Roth, which means it'll take about ten years to get all that money into it, which is kinda pointless. (It'll take a bit less than ten years because they do keep raising the limits, but still.) Of course a couple can cut that in half because you can both open Roth IRAs.

Also, you can't actually borrow from a Roth IRA. You can withdraw your contributions at any time without penalty, but you can't just turn around and put the money back in. You can continue to contribute, of course, but if you'd be doing that anyway, it's not at all the same as paying back what you took out.

Also, you can't contribute to a Roth IRA in any year you make $110,000 or you and your spouse together make $160,000, which might be a factor here.

So the Roth may not really be the best vehicle here.

I'd put the $10,000 in a high-interest (4%) savings account and put the rest in a regular brokerage account and invest it in one or more index funds (ideally split among US and international stocks and bonds).
posted by kindall at 12:49 PM on January 4, 2006

Just like kindall said, look at ing.com . They have high interest savings and cd's. You want money not tied up anywhere in case of household emergency's. Trust me, you will eventually have an emergency after your home warranty expires, usually right after it expires.
posted by Weeman at 12:54 PM on January 4, 2006

Is it out of line to suggest paying off some of the mortgage if you can do that without penalty? It seems like getting 4% from an ING savings account or CD would probably be losing ground unless you got a terrific rate. I understand the desire to have some liquidity, but it seems like you could always take out another mortgage or home equity loan if you needed cash for anything. I'll be the first to admit that I'm not financial expert.
posted by MarkAnd at 5:29 PM on January 4, 2006

Paying off the mortgage is not a bad idea per se, it's just that over time you'll be well ahead of the curve if you put the money into stocks. A mortgage at 6% is "really" around 4.5% after you factor in the tax savings, while the US stock market has historically returned in the low double digits.
posted by kindall at 5:52 PM on January 4, 2006

Educate yourself. Someone will be earning the commissions. If it isn't you, then it should be a financial advisor with a good track record. The biggest question is can you advise with your head and not get too emotional when the roller coaster picks up speed. Educate yourself. Educate yourself.
posted by JamesMessick at 6:18 PM on January 4, 2006

I don't know about the LA market, but when we bought our condo in the Bay Area my realtor friend urged us to put in hardwood or laminate flooring. The under $10k investment in laminate wood floors increased the value of the condo over $30k.
posted by Devils Slide at 5:34 AM on January 5, 2006