Financial Advisor or No Financial Advisor
July 20, 2018 9:21 AM Subscribe
Should I use a financial Advisor or invest and plan on my own?
I'm in my late 30's. I've saved a decent amount of money but I haven't ventured into investing or financial planning. I'm a good saver. I've got a little chunk of cash that I feel I can start to invest with and plan for retirement. That's in addition to a large emergency fund that I keep as my work is not stable so I like to have a good amount of cash on hand for the slow times I have with work. My wife's work is more stable. She has a decent 401k. Beyond that we have no investments and no real "plan" in place for retirement. I know very little about investing, the stock market, and how to grow money. I've sincerely tried to learn through research, asking questions to friends and family but every time I try to learn about it I get overwhelmed and just crawl up in a little ball of frustraion(well not literally, haha). I'm not much of a risk taker when it comes to money. So I recently found a financial advisor who seems to have an excellent reputation. I also felt comfortable when I met with him. He takes 1% of money you have with him. Some friends and family have said I'm better off just opening up some accounts with places like Vanguard or Fidelity and using the advisors I would have access to there as they don't charge those kind fees...though I know there's always some fees. But Vanguard for example is pretty low cost. That said my instinct is leaning towards a financial advisor. My reasoning is that I just feel extremely uncomfortable dealing with investments and planning since I'm very much in the dark. I guess essentially I want someone to do it all for me so I don't have to worry about it. But maybe that would be extremely naive. The question: Is a good financial advisor worth the 1% for someone like me? Any thoughts would be great!
I'm in my late 30's. I've saved a decent amount of money but I haven't ventured into investing or financial planning. I'm a good saver. I've got a little chunk of cash that I feel I can start to invest with and plan for retirement. That's in addition to a large emergency fund that I keep as my work is not stable so I like to have a good amount of cash on hand for the slow times I have with work. My wife's work is more stable. She has a decent 401k. Beyond that we have no investments and no real "plan" in place for retirement. I know very little about investing, the stock market, and how to grow money. I've sincerely tried to learn through research, asking questions to friends and family but every time I try to learn about it I get overwhelmed and just crawl up in a little ball of frustraion(well not literally, haha). I'm not much of a risk taker when it comes to money. So I recently found a financial advisor who seems to have an excellent reputation. I also felt comfortable when I met with him. He takes 1% of money you have with him. Some friends and family have said I'm better off just opening up some accounts with places like Vanguard or Fidelity and using the advisors I would have access to there as they don't charge those kind fees...though I know there's always some fees. But Vanguard for example is pretty low cost. That said my instinct is leaning towards a financial advisor. My reasoning is that I just feel extremely uncomfortable dealing with investments and planning since I'm very much in the dark. I guess essentially I want someone to do it all for me so I don't have to worry about it. But maybe that would be extremely naive. The question: Is a good financial advisor worth the 1% for someone like me? Any thoughts would be great!
I personally wouldn't - not only is that expensive: returns are very low right now if you adjust for risk and inflation so 1% ends up being a large chunk of any growth and you pay it in a down year too! But also, I like to understand where my money is and why, it's not that complicated - advisors make a lot of money on commission for exotic products when most are best off with a simple index fund for long term growth and cash for short term / emergency savings.
posted by JonB at 9:38 AM on July 20, 2018
posted by JonB at 9:38 AM on July 20, 2018
The key to investing for amateurs (and really, we all are!) is to figure out the best way to hang on to the most money you can, and grow it in a safe manner, so as to take advantage of the Miracle of Compounding Interest.
I'd suggest two things:
1. Do some high-level research on a good (Morningstar 5-star rating) Index Fund or two - you can pick the index you want to buy (Dow Jones - aka DJIA, NASDQ, etc), and put some money into those and forget it. It's not clear from your question, but it sounds like this is money you've already paid income tax on, in which case, use the person you find in step 2 to help you set up a Roth account for at least some of this money. Roth are magical because they grow, and you can withdraw from them, tax-free. That means no 15% capital gains tax - which is HUGE.
2. THEN, find a Fiduciary Financial Advisor - the first word is the key, someone who acts as a Fiduciary is bound by law to represent your interests over your own.
I don't like investors who 'make money when we make money', because they don't also lose when you do. Similarly, and 1% fee doesn't sound like much, until you do the compounding on that fee over, say 10 years. You're 30-ish years out from retirement, and that 1% would amount to a Giant Pile of Money, if left to compound instead. Also, with a recurring fee, your agent makes money even in years when you don't, and those years will happen.
The key to long-term is to not react to markets or economies. If you can just let that sucker compound forever, and grow, and add to it regularly, you'll be way ahead.
I'd also recommend the Freakonomics Podcast - especially the episode "The Stupidest Thing You Can do With Your Money"
Good luck!
posted by dbmcd at 9:40 AM on July 20, 2018 [1 favorite]
I'd suggest two things:
1. Do some high-level research on a good (Morningstar 5-star rating) Index Fund or two - you can pick the index you want to buy (Dow Jones - aka DJIA, NASDQ, etc), and put some money into those and forget it. It's not clear from your question, but it sounds like this is money you've already paid income tax on, in which case, use the person you find in step 2 to help you set up a Roth account for at least some of this money. Roth are magical because they grow, and you can withdraw from them, tax-free. That means no 15% capital gains tax - which is HUGE.
2. THEN, find a Fiduciary Financial Advisor - the first word is the key, someone who acts as a Fiduciary is bound by law to represent your interests over your own.
I don't like investors who 'make money when we make money', because they don't also lose when you do. Similarly, and 1% fee doesn't sound like much, until you do the compounding on that fee over, say 10 years. You're 30-ish years out from retirement, and that 1% would amount to a Giant Pile of Money, if left to compound instead. Also, with a recurring fee, your agent makes money even in years when you don't, and those years will happen.
The key to long-term is to not react to markets or economies. If you can just let that sucker compound forever, and grow, and add to it regularly, you'll be way ahead.
I'd also recommend the Freakonomics Podcast - especially the episode "The Stupidest Thing You Can do With Your Money"
Good luck!
posted by dbmcd at 9:40 AM on July 20, 2018 [1 favorite]
In my opinion, unless you have a crazy amount of money (9 figures, not low 6) to start investing, or you have non-standard dreams (retiring really early, need money in 5 years instead of some indeterminate time maybe 20 years into the future), or your job and investment ability is very spotty (ie: $20k one year, 0 the next) then honestly there is nothing to investing and nothing that a financial advisor will add.
I know that people like to say that markets go up and down, but I've had a 2 Vanguard accounts for the past 18 years and I've done nothing to change them other than invest more every month. It's more like a bill or house payment than anything else. That's what middle (well, upper) class investing is. It's not moving money around, 'researching', chasing gains, constant concern about the economy, whatever.
Once you get closer to retirement, then yes, speaking with an advisor about upcoming goals is a good idea.
What are the 2 accounts? One is a IRA and one is a regular taxable account (roth or regular IRA, they both have advantages and disadvantages, just pick one - or have a regular IRA for your spouse and ROTH IRA for you). These have tax advantages and are $5500 each for you and your spouse.
On the taxable account, I have a decent amount of money, reinvest dividends, and pay very little tax every year.
Yes, you can go mental and turn investing into a career, but it certainly doesn't have to be. I just had to have $3k 18 years ago to invest in a Vanguard account.
posted by The_Vegetables at 9:48 AM on July 20, 2018 [9 favorites]
I know that people like to say that markets go up and down, but I've had a 2 Vanguard accounts for the past 18 years and I've done nothing to change them other than invest more every month. It's more like a bill or house payment than anything else. That's what middle (well, upper) class investing is. It's not moving money around, 'researching', chasing gains, constant concern about the economy, whatever.
Once you get closer to retirement, then yes, speaking with an advisor about upcoming goals is a good idea.
What are the 2 accounts? One is a IRA and one is a regular taxable account (roth or regular IRA, they both have advantages and disadvantages, just pick one - or have a regular IRA for your spouse and ROTH IRA for you). These have tax advantages and are $5500 each for you and your spouse.
On the taxable account, I have a decent amount of money, reinvest dividends, and pay very little tax every year.
Yes, you can go mental and turn investing into a career, but it certainly doesn't have to be. I just had to have $3k 18 years ago to invest in a Vanguard account.
posted by The_Vegetables at 9:48 AM on July 20, 2018 [9 favorites]
I would think seriously about going with Vanguard rather than the 1% guy. If you have less than $50k to invest, the only thing you really need to do is buy a Target Date fund. My own thinking would be to invest $X amount per month in the Target Date fund -- whatever amount that I wanted to put at risk in the market, while keeping sufficient cash savings for any emergencies etc. Keep it simple.
If you have more than $50k to invest, I would seriously think about getting an advisor through Vanguard, if you really want an advisor. The Vangaurd advisor cost is .30% (if you have $50k with them), so less than a third of the 1% guy, and they will only be selling you Vanguard products, which are among the cheapest sold.
My concern with the advisor is not only the 1% cost but also that he will put you in expensive products that are no better than what you would get with some simple choices at Vanguard.
posted by Mid at 9:51 AM on July 20, 2018 [6 favorites]
If you have more than $50k to invest, I would seriously think about getting an advisor through Vanguard, if you really want an advisor. The Vangaurd advisor cost is .30% (if you have $50k with them), so less than a third of the 1% guy, and they will only be selling you Vanguard products, which are among the cheapest sold.
My concern with the advisor is not only the 1% cost but also that he will put you in expensive products that are no better than what you would get with some simple choices at Vanguard.
posted by Mid at 9:51 AM on July 20, 2018 [6 favorites]
He takes 1% of money you have with him.Nope, nope, nope. You may not need a planner, and if you do get a planner then you absolutely should not have a commission-based planner.
If you're only investing in 401ks and IRAs (i.e. largely idiot-proof tax-sheltered retirement accounts) then this stuff really isn't that hard: hold 6 months expenses in a savings account, then sign up for a Vanguard IRA, buy index funds. Pick any of these books and skip the planner. I understand the impulse behind "I guess essentially I want someone to do it all for me so I don't have to worry about it", but I think you're overestimating how difficult it is.
But I have a planner and here's why: personal finance more broadly is really complicated. A planner can help you track and understand you income and expenses, figure out life insurance (very important!) and estate planning (also very important!). This stuff is also covered in personal finance books, but it is significantly more complicated than, e.g. buying a Vanguard fund.
But a commission-based planner is not the right person to help with this stuff. Their incentives are all wrong, and they can cost more even if their advice turns out to be good. You want a fiduciary, fee-only planner. Search the XY network or the Fee-only network.
I like mine, and he works remotely. Message me if you want his name.
posted by caek at 9:59 AM on July 20, 2018 [11 favorites]
A 1% fee is pretty expensive over the long term. It might be worthwhile to pay in the short term to get you familiar with the kinds of investments etc. - basically, you're paying someone to hold your hand while you gain confidence to do it yourself.
On the other hand, now is the perfect time to learn, and it's not that hard to be competent at investing. You might as well bite the bullet now, rather than leaving it for later.
There are plenty of books, online resources, etc., but the basic idea is simple: If you believe in efficient markets, you need to accept that *you*, a tiny investor, are never going to beat the market in the long term. (Most professional money managers don't beat the market, of course, and that's *before* fees.)
This is really hard to accept. Most people can't accept it, and that's why people chase all over for that elusive "better return" or higher rated fund. And in the long term, those are all mirages. In the short term, you look like a genius for buying Netflix because you liked the red envelopes. Or you look like an idiot after sinking your savings into Theranos. But on the long term average, no (regular) investor beats the market.
If you can accept this, then the best you can do is to ruthlessly match the market. Shave off every last point of inefficiency, drastically minimize management costs - that 1% fee is tragic in this light, minimize portfolio turnover to avoid transaction fees, pay attention to taxes. All of these are (small) drags on your returns, and when the best you can do is to match the market, those drags cumulatively *hurt*.
And that's how you end up with the standard recommendation: skip the advisor, open a Vanguard account, and buy into your retirement target date fund.
(Or if you'd like to buy into the market: VT, the Vanguard Total World Stock ETF for the ultimate in diversification, with a 0.10% expense ratio. Don't care about anything beyond the US? Buy VTI, the Vanguard Total (US) Stock Market ETF, with a 0.04% expense ratio. Just - pay attention to the diversification and that expense ratio.)
posted by RedOrGreen at 10:03 AM on July 20, 2018 [3 favorites]
On the other hand, now is the perfect time to learn, and it's not that hard to be competent at investing. You might as well bite the bullet now, rather than leaving it for later.
There are plenty of books, online resources, etc., but the basic idea is simple: If you believe in efficient markets, you need to accept that *you*, a tiny investor, are never going to beat the market in the long term. (Most professional money managers don't beat the market, of course, and that's *before* fees.)
This is really hard to accept. Most people can't accept it, and that's why people chase all over for that elusive "better return" or higher rated fund. And in the long term, those are all mirages. In the short term, you look like a genius for buying Netflix because you liked the red envelopes. Or you look like an idiot after sinking your savings into Theranos. But on the long term average, no (regular) investor beats the market.
If you can accept this, then the best you can do is to ruthlessly match the market. Shave off every last point of inefficiency, drastically minimize management costs - that 1% fee is tragic in this light, minimize portfolio turnover to avoid transaction fees, pay attention to taxes. All of these are (small) drags on your returns, and when the best you can do is to match the market, those drags cumulatively *hurt*.
And that's how you end up with the standard recommendation: skip the advisor, open a Vanguard account, and buy into your retirement target date fund.
(Or if you'd like to buy into the market: VT, the Vanguard Total World Stock ETF for the ultimate in diversification, with a 0.10% expense ratio. Don't care about anything beyond the US? Buy VTI, the Vanguard Total (US) Stock Market ETF, with a 0.04% expense ratio. Just - pay attention to the diversification and that expense ratio.)
posted by RedOrGreen at 10:03 AM on July 20, 2018 [3 favorites]
I looked into this and ended up going with Vanguard Target Date Funds. Super easy and it gets rebalanced as you approach retirement automatically.
posted by rabbitrabbit at 10:04 AM on July 20, 2018
posted by rabbitrabbit at 10:04 AM on July 20, 2018
I fully agree with Mid's suggestion. With this type of fund, the investment company manages your money for you. Index fund investing is fine for stocks but you don't want all of your money in stocks unless you can afford to lose a substantial portion of it. You should have a diversified portfolio of stocks, bonds, and money markets, and the target date fund will do this automatically, and adjust the mixture as your target date gets closer.
posted by davcoo at 10:05 AM on July 20, 2018
posted by davcoo at 10:05 AM on July 20, 2018
After many recommendations here, my wife and I went to go see a fee-based financial planner. She worked on a fixed basis, billing for her time. We met with her to talk about our goals, provided her with all the information we could pull together on our assets, and let her go to work.
She came back with a plan for us, which included consolidating some investment accounts, splitting our assets between half a dozen or so low-fee index funds, and minimizing our investment costs based on the investment platforms we were already working on. She also gave us some recommendations regarding planning for our kid's college expenses, as well as some things to think about regarding life and disability insurance.
She also gave us advice regarding what we should do with future investable money (basically, unless we have major life changes, continue to invest it in order to rebalance towards the balance of funds she suggested).
The confidence we gained in the idea that we had a workable, cost-effective plan that fit our goals and risk tolerances was well worth what we paid her.
posted by craven_morhead at 10:06 AM on July 20, 2018 [1 favorite]
She came back with a plan for us, which included consolidating some investment accounts, splitting our assets between half a dozen or so low-fee index funds, and minimizing our investment costs based on the investment platforms we were already working on. She also gave us some recommendations regarding planning for our kid's college expenses, as well as some things to think about regarding life and disability insurance.
She also gave us advice regarding what we should do with future investable money (basically, unless we have major life changes, continue to invest it in order to rebalance towards the balance of funds she suggested).
The confidence we gained in the idea that we had a workable, cost-effective plan that fit our goals and risk tolerances was well worth what we paid her.
posted by craven_morhead at 10:06 AM on July 20, 2018 [1 favorite]
You may be curling up in a ball but how about your wife? Is she participating in any of the planning? It sounds like you're in the position of taking actions across a wide spectrum, on one end I'd say you need a comprehensive plan that involves both of your (you and your wife) savings (both tax-advantaged and not) and the whole question of where are you in your life and what are your goals? Going to have kids? Need to save for any particular purpose e.g. college? One thing you should stretch yourself on is your reticence for risk; at your age you can afford to be agressive in your investments.
On one end of the spectrum you could just: 1. Make sure you're emergency fund is liquid, safe, and not losing too much to inflation, 2. Take advantage of as much tax-deferral as possible (IRA, either Roth or not), 3. Invest whatever you have left in a small portfolio of low-cost index funds that cover the various axes of domestic-international, large to small cap, growth-value without worrying too much now about bonds (go straight to Vanguard or Fidelity, don't bother setting up an on-line trading account just to trade their index funds). This approach, where you take care of it yourself will take some initiative, but remember that in taking this journey you'll be preparing yourself to be an informed manager of your affairs into the future.
The other end is you engage the 1% guy. If he's good, he'll ask you all those deep life questions posed in the previous paragraph and even want to know how your wife's money is invested in order to give your total portfolio balance. Done correctly and thoroughly you may end up getting quite a bit for your money since the total balance you have invested with him (initially at least) will be "low". Other's concerns about that 1% (every year!) are valid, but you have to ask yourself what you're getting for it. If he is good he'll make that much over what you might be able to do. Although it's true that it's tough to time the market or pick individual stocks or funds a good advisor can be worth their money when it comes to taking care of the big picture if you are unable to for any reason.
Me, I got both. A chunk that I'm managing myself in 2 different 401s and 2 different IRAs and a couple other odd accounts, and a chunk I inherited that's still with the 1% guy that I feel comfortable leaving that money with because he does a good job.
An middle alternative would be a one-or-a-couple-times consult with a fee-based planner. Again they will want to know your big picture and can create a comprehensive plan that you can implement or pay them more to.
My bottom-line recommendation echoes other folks here. Get yourself out of the fetal position (no offense) and just get the basics in place; go indexes or target-date, plan for your tax situation (think seriously about Roth but having some in both types has advantages). There are a lot of sources for help out there and if you do attack this yourself and with your wife you both will be settings yourselves up with the knowledge and confidence for long-term fiscal and marital success (because so many marriages get in trouble over money issues).
Not to give you another thing to worry about, but one part of a foundation of a good fiscal plan is insurance. Make sure you, your loved ones, your property, and also maybe your future income are protected.
posted by achrise at 10:13 AM on July 20, 2018
On one end of the spectrum you could just: 1. Make sure you're emergency fund is liquid, safe, and not losing too much to inflation, 2. Take advantage of as much tax-deferral as possible (IRA, either Roth or not), 3. Invest whatever you have left in a small portfolio of low-cost index funds that cover the various axes of domestic-international, large to small cap, growth-value without worrying too much now about bonds (go straight to Vanguard or Fidelity, don't bother setting up an on-line trading account just to trade their index funds). This approach, where you take care of it yourself will take some initiative, but remember that in taking this journey you'll be preparing yourself to be an informed manager of your affairs into the future.
The other end is you engage the 1% guy. If he's good, he'll ask you all those deep life questions posed in the previous paragraph and even want to know how your wife's money is invested in order to give your total portfolio balance. Done correctly and thoroughly you may end up getting quite a bit for your money since the total balance you have invested with him (initially at least) will be "low". Other's concerns about that 1% (every year!) are valid, but you have to ask yourself what you're getting for it. If he is good he'll make that much over what you might be able to do. Although it's true that it's tough to time the market or pick individual stocks or funds a good advisor can be worth their money when it comes to taking care of the big picture if you are unable to for any reason.
Me, I got both. A chunk that I'm managing myself in 2 different 401s and 2 different IRAs and a couple other odd accounts, and a chunk I inherited that's still with the 1% guy that I feel comfortable leaving that money with because he does a good job.
An middle alternative would be a one-or-a-couple-times consult with a fee-based planner. Again they will want to know your big picture and can create a comprehensive plan that you can implement or pay them more to.
My bottom-line recommendation echoes other folks here. Get yourself out of the fetal position (no offense) and just get the basics in place; go indexes or target-date, plan for your tax situation (think seriously about Roth but having some in both types has advantages). There are a lot of sources for help out there and if you do attack this yourself and with your wife you both will be settings yourselves up with the knowledge and confidence for long-term fiscal and marital success (because so many marriages get in trouble over money issues).
Not to give you another thing to worry about, but one part of a foundation of a good fiscal plan is insurance. Make sure you, your loved ones, your property, and also maybe your future income are protected.
posted by achrise at 10:13 AM on July 20, 2018
Financial advisors always make 1% sound like a small amount, but I always like to think of 1% in the context that you can take about 4% out of your retirement funds every year once you're retired. In that situation, 1% is TWENTY FIVE PERCENT of your income. If you wouldn't pay a financial planner 25% of your income, don't pay them 1% in perpetuity. As caek says financial advisors' incentives are typically all wrong, they have an incentive to put you in funds that generate a commission for them (this is money straight out of your pocket) in addition to the 1% they charge every year. Not only that there is a chance that they can put you in the types of funds that can be costly to leave, or put you in investments like whole life insurance which are generally bad investments but generate tons of commission for them.
Take your time, read a couple books (The Bogleheads' Guide to Investing is a good one, "If you Can: How Millennials Can Get Rich Slowly(PDF)" is a free PDF that lays out the basics), and then decide if you want to deal with an advisor. But even if you do want an advisor, I would heavily suggest you go with a fee-only planner. Paying a couple hundred or thousand now out of pocket for a financial plan probably sounds like a lot, but paying $10,000 a year every year (if you end up with a million) is much more pain in the long run.
posted by matcha action at 10:22 AM on July 20, 2018 [8 favorites]
Take your time, read a couple books (The Bogleheads' Guide to Investing is a good one, "If you Can: How Millennials Can Get Rich Slowly(PDF)" is a free PDF that lays out the basics), and then decide if you want to deal with an advisor. But even if you do want an advisor, I would heavily suggest you go with a fee-only planner. Paying a couple hundred or thousand now out of pocket for a financial plan probably sounds like a lot, but paying $10,000 a year every year (if you end up with a million) is much more pain in the long run.
posted by matcha action at 10:22 AM on July 20, 2018 [8 favorites]
Seconding matcha action’s link to “If You Can.” It’s a highly readable and free book that you should internalize before making any decisions.
1% is ridiculous, especially since it’s on the amount invested, and you will be paying it each year, whether the market goes up or down. Imagine being down 40% in a bear market and paying 1% for your advisor’s services on top of that. And, yes, you would be paying a quarter or one-fifth of your annual average gains. Just stick it in a Vanguard target date fund and forget it. Here is a chart showing just how much that 1% will cost you over time; it’s staggering.
posted by Atrahasis at 10:29 AM on July 20, 2018
1% is ridiculous, especially since it’s on the amount invested, and you will be paying it each year, whether the market goes up or down. Imagine being down 40% in a bear market and paying 1% for your advisor’s services on top of that. And, yes, you would be paying a quarter or one-fifth of your annual average gains. Just stick it in a Vanguard target date fund and forget it. Here is a chart showing just how much that 1% will cost you over time; it’s staggering.
posted by Atrahasis at 10:29 AM on July 20, 2018
If he is good he'll make that much over what you might be able to do.
No, no, he really won't. Especially when you include the costs of the expensive funds he is likely to steer you into for kickbacks. These people are not advisors, whatever they call themselves; they are salespeople. They are not legally required to consider your best interests. They are legally allowed to steer you into the worst, highest-priced possible choices in order to get the biggest possible commissions (so long as the investments aren't fundamentally unsuitable, a high standard to meet). Why would you trust anyone like that? Of course you feel comfortable with this guy. He's a salesman. His real job is schmoozing you, not thinking about your finances.
A fee-only planner has different incentives, is usually required to act as a fiduciary (in your best interests; confirm first), and may give you some comfort. It might be worth paying for a few sessions. But in fact the basic strategy for people in your position isn't hard at all (guaranteeing the future is impossible, but implementing the insights laid out in Red or Green's response, which, given what we know now, will position you reasonably well against future changes, is pretty simple, with a couple variants based largely on whether you intend to buy a house in the relatively near future). My own money is basically in emergency savings + 4 Vanguard funds, and it would be 3 if I weren't thinking about house-buying. If you do see a fee-only advisor, ask for further reading, but the books recommended in this thread are also good.
posted by praemunire at 10:34 AM on July 20, 2018 [3 favorites]
No, no, he really won't. Especially when you include the costs of the expensive funds he is likely to steer you into for kickbacks. These people are not advisors, whatever they call themselves; they are salespeople. They are not legally required to consider your best interests. They are legally allowed to steer you into the worst, highest-priced possible choices in order to get the biggest possible commissions (so long as the investments aren't fundamentally unsuitable, a high standard to meet). Why would you trust anyone like that? Of course you feel comfortable with this guy. He's a salesman. His real job is schmoozing you, not thinking about your finances.
A fee-only planner has different incentives, is usually required to act as a fiduciary (in your best interests; confirm first), and may give you some comfort. It might be worth paying for a few sessions. But in fact the basic strategy for people in your position isn't hard at all (guaranteeing the future is impossible, but implementing the insights laid out in Red or Green's response, which, given what we know now, will position you reasonably well against future changes, is pretty simple, with a couple variants based largely on whether you intend to buy a house in the relatively near future). My own money is basically in emergency savings + 4 Vanguard funds, and it would be 3 if I weren't thinking about house-buying. If you do see a fee-only advisor, ask for further reading, but the books recommended in this thread are also good.
posted by praemunire at 10:34 AM on July 20, 2018 [3 favorites]
Just a note: everyone who is getting outraged about the 1% and suggesting that he go to a "fee only planner" -- charging a percentage of assets is a very standard way for fee only planners to charge. What "fee only" means is that the planner only makes money from fees charged to the customer and not from commissions from products he/she is pushing. It doesn't mean that the fee has to be hourly or fixed regardless of the assets though some planners do work like that.
Also, the word "advisor" sounds fancy but is generally completely unregulated and in many places, it's just a prettier way of saying "salesman." It's often equivalent to going to a "beauty advisor" at Macy's. Definitely don't go to any advisor at your local bank, etc who gets paid on commission for selling some products to you and ensure that the advisor is operating under a fiduciary standard.
I agree with everyone that for a typical middle-class investor, the advice the planner will give should be completely standard and equivalent to what you'd find in the book above or the boggleheads website (great resource btw). The only reason to go the advisor route is for the psychological benefit: if paying someone to organize a plan for you will make you better about investing regularly, not selling everything in a panic if the market goes down, not moving all your money to the latest hot-tip stock some shyster is promoting, etc then it may be money well spent. I think most people shouldn't need the hand-holding for how expensive it is but you know you. If you go to an advisor, consider paying one a one-off fee to develop a plan and explain things to you (again, the plan in reality should be the same bog-standard plan that all the resources above explain but maybe hearing it from a person will be better for you) instead of ongoing annual fees.
posted by bsdfish at 10:41 AM on July 20, 2018 [4 favorites]
Also, the word "advisor" sounds fancy but is generally completely unregulated and in many places, it's just a prettier way of saying "salesman." It's often equivalent to going to a "beauty advisor" at Macy's. Definitely don't go to any advisor at your local bank, etc who gets paid on commission for selling some products to you and ensure that the advisor is operating under a fiduciary standard.
I agree with everyone that for a typical middle-class investor, the advice the planner will give should be completely standard and equivalent to what you'd find in the book above or the boggleheads website (great resource btw). The only reason to go the advisor route is for the psychological benefit: if paying someone to organize a plan for you will make you better about investing regularly, not selling everything in a panic if the market goes down, not moving all your money to the latest hot-tip stock some shyster is promoting, etc then it may be money well spent. I think most people shouldn't need the hand-holding for how expensive it is but you know you. If you go to an advisor, consider paying one a one-off fee to develop a plan and explain things to you (again, the plan in reality should be the same bog-standard plan that all the resources above explain but maybe hearing it from a person will be better for you) instead of ongoing annual fees.
posted by bsdfish at 10:41 AM on July 20, 2018 [4 favorites]
Just a note: everyone who is getting outraged about the 1% and suggesting that he go to a "fee only planner" -- charging a percentage of assets is a very standard way for fee only planners to charge.
I don't think most people go see fee-only planners indefinitely, though, which would be the idea here (and 1% sounds high to me for a fee-only consultation, but I'm not intimately familiar with pricing, so I could be wrong about that). Paying $1K or whatever once to get a long-term plan is quite different from getting into the habit of doing it yearly.
posted by praemunire at 11:09 AM on July 20, 2018 [2 favorites]
I don't think most people go see fee-only planners indefinitely, though, which would be the idea here (and 1% sounds high to me for a fee-only consultation, but I'm not intimately familiar with pricing, so I could be wrong about that). Paying $1K or whatever once to get a long-term plan is quite different from getting into the habit of doing it yearly.
posted by praemunire at 11:09 AM on July 20, 2018 [2 favorites]
I use a computer generated investment service that does all the things a 1% human does but only charges .25%. To date in the year I have been using them they have exceeded the market. You can choose your risk level on a 1-10 scale. This particular service has over 6 Billion in assets. I am quite pleased with the results and cost savings.
posted by Xurando at 1:18 PM on July 20, 2018
posted by Xurando at 1:18 PM on July 20, 2018
Here's my take. Let's say you have $10,000 now, just as an example that is also a nice round number. There's a lot of ways to slice it and just as many future possibilities, but a not-bad guess at long term investment returns is 8.5% for a middle of the road portfolio. There's also a lot of possibilities on what inflation could be, but over the last couple of decades, it's been around 2.2%.
Okay, so let's say your advisor gets you market rate returns (most don't*), but takes his 1% and does so by putting you in more expensive funds that have fees of 1.5%. In 25 years, as you approach retirement, your $10,000 will have grown to around $25,400 after inflation. That's nice! But if you went with a much cheaper option, like do it yourself on a Vanguard fund, (I like Mid's advice), then you would have over $42,900 instead. That's $17,500 difference. (Multiply the amount you have saved up by 1.75x and think about that being a potential difference.) If you decide to additionally contribute $1000 per year, again just a round number, in 25 years you would have over $65K with your advisor, but with a cheaper do it yourself option you'd be at $98K.
But on the other hand, let's suppose you have freaked out because this stuff can be intimidating and there's thousands of people out there with thousands of takes, and you left it in a savings account that pays no interest because that's easier. In that case, thanks to inflation, your $10,000 is worth only $5,700 as you get to retirement. In the annual contribution version, you start with 10 grand, then save another thousand bucks a year for 25 years to wind up with... $25,124 in purchasing power.
So congratulations for taking an important step; even a not-great advisor is better than doing nothing. It's important to remember this; if you want an analogy, there's lots of different kinds of exercise and lots of opinions on what is best and perhaps this workout isn't optimal, but at least you've gotten off the couch. But you could do an awful lot better with not a lot more work.
* This is an important takeaway BTW; your advisor is unlikely to do better than you can with a very simple solution like a Vanguard Target Date fund, and is most likely to do worse, before he takes his fees. I'm being generous in these assumptions by saying he does as well as a market average -- he's likely to do worse. If he underperforms by just 1%, getting 7.5% before his fees, you wind up with $20K without contributions and $55K with.
posted by Homeboy Trouble at 3:46 PM on July 20, 2018
Okay, so let's say your advisor gets you market rate returns (most don't*), but takes his 1% and does so by putting you in more expensive funds that have fees of 1.5%. In 25 years, as you approach retirement, your $10,000 will have grown to around $25,400 after inflation. That's nice! But if you went with a much cheaper option, like do it yourself on a Vanguard fund, (I like Mid's advice), then you would have over $42,900 instead. That's $17,500 difference. (Multiply the amount you have saved up by 1.75x and think about that being a potential difference.) If you decide to additionally contribute $1000 per year, again just a round number, in 25 years you would have over $65K with your advisor, but with a cheaper do it yourself option you'd be at $98K.
But on the other hand, let's suppose you have freaked out because this stuff can be intimidating and there's thousands of people out there with thousands of takes, and you left it in a savings account that pays no interest because that's easier. In that case, thanks to inflation, your $10,000 is worth only $5,700 as you get to retirement. In the annual contribution version, you start with 10 grand, then save another thousand bucks a year for 25 years to wind up with... $25,124 in purchasing power.
So congratulations for taking an important step; even a not-great advisor is better than doing nothing. It's important to remember this; if you want an analogy, there's lots of different kinds of exercise and lots of opinions on what is best and perhaps this workout isn't optimal, but at least you've gotten off the couch. But you could do an awful lot better with not a lot more work.
* This is an important takeaway BTW; your advisor is unlikely to do better than you can with a very simple solution like a Vanguard Target Date fund, and is most likely to do worse, before he takes his fees. I'm being generous in these assumptions by saying he does as well as a market average -- he's likely to do worse. If he underperforms by just 1%, getting 7.5% before his fees, you wind up with $20K without contributions and $55K with.
posted by Homeboy Trouble at 3:46 PM on July 20, 2018
You don't need to be comfortable with someone you're not going to speak to for 20 years. Meaning: if you don't know shit about investing, put your money in a Vanguard fund and leave it there.
posted by DarlingBri at 5:45 PM on July 20, 2018 [2 favorites]
posted by DarlingBri at 5:45 PM on July 20, 2018 [2 favorites]
One of the reasons why investing seems so scary and complicated is that there are large sectors of the financial industry whose very existence depends on keeping you confused and anxious. A few years back, Frontline did an episode called The Retirement Gamble - there's probably some parts of it that are now out of date, but it's still worth a watch.
posted by Mary Ellen Carter at 5:50 PM on July 20, 2018 [2 favorites]
posted by Mary Ellen Carter at 5:50 PM on July 20, 2018 [2 favorites]
By the way, the reason I said invest $X month (rather than just drop it all into the Target Date fund at once) is to deal with the psychological block that I tend to suffer from - fear of timing the market badly. Whenever I have an investment decision, I always worry that I am going to invest on the day before a huge drop and then feel like an idiot. So, when I have a sum to invest, I set it up with an automatic investing program to put in $X month until the sum is fully invested (Vanguard and Fidelity make this easy, probably other brokerages too). This is called "dollar-cost averaging" and is an old time strategy, which is actually probably inefficient because it's almost always better to get your money into the market sooner. But, from a peace of mind perspective, I really like DCA because it makes me feel like the investment decisions are "out of my hands" and therefore helps with the discipline of continuing to invest, even when the market is down.
posted by Mid at 4:50 AM on July 21, 2018 [1 favorite]
posted by Mid at 4:50 AM on July 21, 2018 [1 favorite]
Apologies in advance if you've already read a book like this in your research but when I was in my mid-twenties and trying to figure out what to do with my money, I read The Complete Idiot's Guide to Personal Finance in Your 20s and 30s. That series has one for people in their 40s and 50s but it doesn't look like it's been updated since 2001. It helped me get familiar with personal finance terms and concepts. Once that was demystified, I was able to figure out that someone as risk adverse as I am should just put money in index funds and not think about it.
posted by Constance Mirabella at 6:52 AM on July 21, 2018
posted by Constance Mirabella at 6:52 AM on July 21, 2018
I am a fee based financial planner who charges 1% of assets. I work in a different country than you.
Choosing an investment is about 10% of what I do for clients for my fee. Here are the other things I do:
When I first meet a client, I go through a detailed 90 minute conversation talking to them about their lives, and from this conversation we arrive at a set of written financial goals, and a number of areas of concern. The goals go on the first page of a written financial plan. Then I use a pretty complex piece of financial planning software to work out the steps they need to take to reach their goals. (or discuss the ways in which their goals are not realistic.) I take into account their workplace pensions or savings plans, government benefits, and any other savings that will be part of their retirement spending. We revisit the plan once a year to discuss any changes in their lives and if any changes need to be made. Are they still on track?
We do a net worth statement, and their plan includes recommendations on how to most effectively meet their goals for paying down debt. (Since I'm fee based, I'm not paid by anyone selling financial products, and so I can be objective in my recommendations.)
We do a cash flow statement, and identify areas of concern with regards to their spending.
We look at the clients' insurance need for life/health/disability coverage. (Since I'm fee based, I'm not paid by anyone selling financial products, and so I can be objective in my recommendations.)
We look at the clients estate plan. Do they have a will? What's in it? What changes might need to be made. I'm not a lawyer, so my role is to identify issues and refer them to one. (Like the clients who had their will done 3 years ago and thought they were fine, but had a baby since then and their will makes no reference to a caregiver or trustee for baby.) Have they named beneficiaries properly on insurance policies and accounts? Do they need a power of attorney? Are they named as the executor in anyone else's will, and are they prepared to meet their obligations?
We look at the client's tax situation and identify things they can do to save tax. Are they saving into the right tax deferred account? In retirement, what account or investment should they draw from first in order to minimize tax in the long term?
We look at the clients education savings needs. Are they saving enough for their child. What help is available from government programs?
We look at a client's work benefits, employee savings plan, and health coverage. I read these documents all the time and am familiar with the plans offered by several large local employers, so I help clients understand their coverage and get the most out of it. When they change jobs, I help the client make decisions on what to do with savings at the company they're leaving behind.
When the client is nearing retirement I help them understand the choices they're being given about pensions and health benefits they are being offered from their employer. If they are being offered a retirement package, I help them understand that. I also help them understand and fill out the necessary forms for their government pensions.
Clients call me for help navigating all kinds of financial issues. Preparing for the care of elderly parents. Management of financial assets for a disabled child. Rent vs Buy. Financial scenarios of downsizing after retirement. Buy vs lease a car. The list goes on and on.
Maybe a third of my time with clients is spent discussing investments. The rest is on the issues above and many more.
Find a Certified Financial Planner.
posted by thenormshow at 7:42 AM on July 22, 2018 [1 favorite]
Choosing an investment is about 10% of what I do for clients for my fee. Here are the other things I do:
When I first meet a client, I go through a detailed 90 minute conversation talking to them about their lives, and from this conversation we arrive at a set of written financial goals, and a number of areas of concern. The goals go on the first page of a written financial plan. Then I use a pretty complex piece of financial planning software to work out the steps they need to take to reach their goals. (or discuss the ways in which their goals are not realistic.) I take into account their workplace pensions or savings plans, government benefits, and any other savings that will be part of their retirement spending. We revisit the plan once a year to discuss any changes in their lives and if any changes need to be made. Are they still on track?
We do a net worth statement, and their plan includes recommendations on how to most effectively meet their goals for paying down debt. (Since I'm fee based, I'm not paid by anyone selling financial products, and so I can be objective in my recommendations.)
We do a cash flow statement, and identify areas of concern with regards to their spending.
We look at the clients' insurance need for life/health/disability coverage. (Since I'm fee based, I'm not paid by anyone selling financial products, and so I can be objective in my recommendations.)
We look at the clients estate plan. Do they have a will? What's in it? What changes might need to be made. I'm not a lawyer, so my role is to identify issues and refer them to one. (Like the clients who had their will done 3 years ago and thought they were fine, but had a baby since then and their will makes no reference to a caregiver or trustee for baby.) Have they named beneficiaries properly on insurance policies and accounts? Do they need a power of attorney? Are they named as the executor in anyone else's will, and are they prepared to meet their obligations?
We look at the client's tax situation and identify things they can do to save tax. Are they saving into the right tax deferred account? In retirement, what account or investment should they draw from first in order to minimize tax in the long term?
We look at the clients education savings needs. Are they saving enough for their child. What help is available from government programs?
We look at a client's work benefits, employee savings plan, and health coverage. I read these documents all the time and am familiar with the plans offered by several large local employers, so I help clients understand their coverage and get the most out of it. When they change jobs, I help the client make decisions on what to do with savings at the company they're leaving behind.
When the client is nearing retirement I help them understand the choices they're being given about pensions and health benefits they are being offered from their employer. If they are being offered a retirement package, I help them understand that. I also help them understand and fill out the necessary forms for their government pensions.
Clients call me for help navigating all kinds of financial issues. Preparing for the care of elderly parents. Management of financial assets for a disabled child. Rent vs Buy. Financial scenarios of downsizing after retirement. Buy vs lease a car. The list goes on and on.
Maybe a third of my time with clients is spent discussing investments. The rest is on the issues above and many more.
Find a Certified Financial Planner.
posted by thenormshow at 7:42 AM on July 22, 2018 [1 favorite]
This thread is closed to new comments.
That said, there are couple of problems with this type of arrangement. The first is that it is expensive since you pay 1% of all your money (not just the earnings) even if it is doing nothing more than sitting in a vanilla S&P index fund. Second, these type of advisors often put you in funds that pay a commission to them so they make extra money while you end up paying more in fees to the mutual fund than otherwise - easily another 1%. Third, you aren't learning anything about how to do this yourself and you are setting yourself up for decades of higher fees.
I used the Vanguard planning service once. They are good at figuring out how to invest the money that you have saved in a way that makes sense (and at the lowest cost with solid returns) but I don't think they give you the same feeling of hand-holding and education about the bigger picture. So, I think they are really great for what they do but probably would not meet the goal of making you less nervous.
The better option is to find a fee only planner who can give you more hand-holding than Vangaurd but can also set things up so that you can take it from there if you feel ready. Can you manage to contact 2 or 3 people and talk to them to see if they feel like a good fit? I think it is worth a little bit of your time to see if you can get that to work for you since it should have a big $ payoff in terms of low investment costs over a lifetime.
posted by metahawk at 9:34 AM on July 20, 2018 [8 favorites]