how do I find a great financial advisor?

August 28, 2006 12:00 PM

my new employer is offering a 401k package via fidelity investments that is, dare I say it, overwhelming to me. I am especially bothered by the fact that the only advise available on said fidelity investment choices is via the nice folks from fidelity investment. so I looked for financial advisors - but how to judge them?

how should I know that whoever is passing themselves off as knowledgeable actually is just that? I want to get good advise but I don't know where to look. any ideas what I should do?

oh yeah, if it matters: I am in my late twenties, single and just moved to chicago. I graduated two and a half years ago and already am well in the top 5% income bracket, so I think I can take a couple risks with my 401k. but again, I am clueless and that bothers me...

posted by krautland to work & money (19 comments total)

Start by reading up at the Motley Fool.
posted by pharm at 12:05 PM on August 28, 2006

NAPFA (National Ass'n of Personal Financial Advisors) website has some good resources:

Checklist (questions to ask of your planner)
Find a Planner
FAQ-sorta

Also, search AskMe -- there have been some great recommendations for books + websites to read for general financial/investement knowledge.

The single most important thing you can do is simply to sign up for your 401(k), especially considering your youth. Start contributing -- maybe pick a Freedom Fund for starters, so it is on autopilot.
posted by misterbrandt at 12:24 PM on August 28, 2006

My advice is this - understand that at this point the most important thing about your 401k savings is not how it is invested after you save it but that you save it at all. Particularly if you're in the top 5%, you stand to make an immediate return on investment of 33% to 53% (by dodging a tax rate of 25-35% you forgot $0.75 to $0.65 in out-of-pocket income to deposit $1 in your account).

Once that money is saved you can jerk around with your allocations all you want. So take a breath, relax, put the money in simple low-cost S&P or International index funds for the moment and take your time educating yourself on the choices.
posted by phearlez at 12:26 PM on August 28, 2006 [1 favorite has favorites]

Whoopsie - you FORGO $0.75 to $0.63
posted by phearlez at 12:27 PM on August 28, 2006

Also, consider that for a 410K, you probably don't need a Financial Advisor (they charge money you know!); you just need to get comfortable with two things:
1. Your "style" - i.e. what's your risk profile? The above-mentioned Motley Fool should have some kind of calculator for this. Basically, it's a way of finding out if you're a sky-diver or a pedestrian (from an investment standpoint); that, couple with your age, will give you a general idea of the types of instruments/mutual funds to invest in.
2. The funds being offered by your plan. After you've figured out what types of funds you want to invest in, check out those in your plan that match that style, and then go to Morningstar, or Yahoo Finance and see how they're rated. Look at the rate of return over time, not just this month or this year, but 5, 10, or over the life of the fund.
But first - if there's matching money from your company, at least max that out right away, and put the money in something low-return, but fairly safe, like a money-market or bond fund. That way you're at least taking advantage of the 'free' money offered by your company.
posted by dbmcd at 12:28 PM on August 28, 2006

I may be mistaken, but I think that Mutual fund administrators (Fidelity, Vanguard, Putnam et al) are not allowed to give advice, and actually contract that part of their Web site out. Check again. I think Fidelity uses Morning Star.
posted by Gungho at 12:37 PM on August 28, 2006

A few things.

1. You're young, so you should, according to typical investment advice, be investing almost entirely in stocks. Stocks fluctuate in the short term, but over periods of decades, they will yield strong, steady returns averaging about 10% annually.

2. Index funds are generally a better deal than managed funds. A managed fund has someone, or a group of people, being paid to pick stocks. 85% of these managed funds fail to beat the market (that is, the average performance of the market as a whole). On top of that, they charge fees for their "services". You are better off using an index fund, which basically invests in a representative sample of the entire market (S&P 500, Dow, etc.). I personally invest 100% of my 401k in index funds, with 50% being in the US and 50% European and Asian funds, because I'm hedging against some kind of economic problems in the US.

3. Invest as much as you can, as early as you can. It's good that you're looking into this. Don't let the little details like the ones I mentioned above slow or stop you from investing. The most important thing is that you actually invest. Compound interest favors the young, and investing heavily in your 20s will pay off many times more than the investing you do in your 30s, 40s, and 50s, simply because of the number of years involved. Most importantly, invest at least enough to get your employer's match, if any. This is a free 100% return-on-investment. But don't let that stop you from investing even more.

4. Once you've made your choices, and your payroll deductions are happening automatically, forget about it. Feel free to look at the quarterly performance statements, but don't pretend they actually mean anything. Stocks are going to fluctuate on a quarterly basis, and it's all basically noise. You have to put your faith in the fact that the market will eventually be in a higher position than it is today, but the day-to-day, or month-to-month changes are meaningless.
posted by knave at 12:37 PM on August 28, 2006

Does your employer have any matching contribution to your 401K? If not it might be well worth you while to pass on the program entirely (obviously, consult an account before making a final decision). Matching funds can often make up for the extremely poor performance of nearly all mutal funds after you account for taxes and management fees (remember that when the fund is reporting their rate of return they almost always show the pre-tax pre-fee value).
posted by Riemann at 12:58 PM on August 28, 2006

Just recently saw this page at Motley Fool, which I found very useful. It gives a priority for where you should put your money, i.e. 401k then IRA then taxable savings, etc.
posted by smackfu at 1:00 PM on August 28, 2006

I may be mistaken, but I think that Mutual fund administrators (Fidelity, Vanguard, Putnam et al) are not allowed to give advice, and actually contract that part of their Web site out.

Not exactly. Fund companies can give advice, but as 401(k)s are subject to ERISA, the "advice" they give will be minimal. On the other hand, a rep at one of these firms can discuss suitability, which is what it sounds like krautland needs.

My advice is this - understand that at this point the most important thing about your 401k savings is not how it is invested after you save it but that you save it at all.

Not exactly. Pull up your favorite growth calculator, and tell me the difference over 40 years between 10% and 7% rates of return.

Also, seeing a financial planner for help allocating the 401(k) is overkill. Put a third in a large-cap index fund, a third in a small-cap fund, and a third in an international fund. Lower fees are usually better.
posted by Kwantsar at 1:03 PM on August 28, 2006

If there's no matching, then I'd start with a Roth IRA -- you take the tax hit right away on the money you contribute, but you never pay tax on the earnings. Over the next 35-40 years, the $4000 you put into a Roth this year will double 5-6 times and become, say, half a million dollars, all of which is completely exempt from tax.

Investing in a tax-deferred vehicle (like a 401(k) or regular IRA) assumes that you will be in a lower tax bracket when you retire than you are now, so you are exempt from tax now on the assumption that you will pay less later. For someone in their twenties this is probably not true -- you will continue earning more as your life goes on, and when you retire you may need a little less, but you'll still probably be in a higher bracket than you are now. So without matching from your employer, the 401(k) would not be as good a deal.

Your priorities should therefore be:

1) Contribute up to the limits of your employer matching (if any) in the 401(k). This earns you an immediate return -- if your employer matches 50% of the first $5,000, the free money will (after compounding) more than make up for any changes to your tax bracket in retirement.

2) Max out your Roth IRA, and if you don't have one, you should.

3) If you still have money left over, max out your 401(k). It's not nearly as good a deal as the employer-matched portion of your 401(k) or the Roth, but at least if you put it in the 401(k), you can't spend it, which is good.

Due to the magic of compounding, by the way, someone who starts saving at the age of 20, saves until 30, and then stops will end up with more money than someone who starts at age 30 and saves the same amount every year until they retire. So it's good that you're starting in your twenties rather than waiting, like I did, until my mid-thirties.

As to what to invest in, find the stock market funds offered by your 401(k) that have the lowest fees. Pick one broad larg-cap market index fund (e.g. S&P 500), one small-cap fund or growth fund, and one international or emerging markets fund, and just divide your money equally among them. If you want to get fancy, put a small percentage (under 10%) in sector funds (such as energy companies or real estate trusts). Don't forget to activate automatic annual rebalancing on the account if it offers the feature, otherwise manually rebalance once a year.

Don't invest a lot of your money in company stock, or even in a fund that focuses on the industry you're in (though that's less risky). If your company suffers a downturn, you may get hit with a double-whammy: you lose your job AND a good chunk of your retirement. Not so good.
posted by kindall at 1:17 PM on August 28, 2006

if your employer matches 50% of the first $5,000

This, I should clarify, is just an example; I don't mean if they pay less than that that you shouldn't bother. You should almost always take full advantage of employer matching.
posted by kindall at 1:19 PM on August 28, 2006

wow! great answers, guys. seriously - thanks. this is beginning to make a lot of sense.

Does your employer have any matching contribution to your 401K?
yes. 100% for the first 2%, 50% on the next 4%. the plan however does state that in order to qualify for matching, I must have completed 1,000 hours of service during that year. given that I joined about a month ago, that seems a bit tight but I think it's doable.

they also offer a profit sharing plan as well as a heavy rebate on company stock via a purchase plan. being new, I will have to wait six months to be eligible but after that I get about 15% off a stock that did pretty well over the past few years. even if it were to go flat for a year or two, it's 15%...

finding out if you're a sky-diver or a pedestrian
I think sky-diver is more me at this point. my thinking here is that if I were to be faced with a total loss, it would be less catastrophic than were I ten or twenty years older. a loss would bite but right now, it's survivable.

I may be mistaken, but I think that Mutual fund administrators (Fidelity, Vanguard, Putnam et al) are not allowed to give advice, and actually contract that part of their Web site out. Check again. I think Fidelity uses Morning Star.
ah, that would explain a lot. there are some morning star infobits on there but they are minimal. I run into this problem with doctors as well whenever I move to a different city.

something I forgot to mention: people in my line of work change companies, cities and even countries of residence often - every two to five years is not unheard of. that's how we keep ourselves interested and (of course) get raises. so while I do plan on retiring in the US, should that influence my strategy at all?
posted by krautland at 1:23 PM on August 28, 2006

My advice is this - understand that at this point the most important thing about your 401k savings is not how it is invested after you save it but that you save it at all.

Not exactly. Pull up your favorite growth calculator, and tell me the difference over 40 years between 10% and 7% rates of return.

You miss my point - the difference between 10% and 7% on $100 is smaller than the difference between an annual return of 10% on $100 and $0.

Repeated, substantial, early savings is more important than the exact nature of the investment. Those same financial calculator sites will often have charts demonstrating that the investor who keeps making contributions year after year will do better than someone who makes a few contributions initially and then slacks off (or starts later) even if the 2nd investor manages a better rate of return.
posted by phearlez at 1:51 PM on August 28, 2006

With regards to starting now as opposed to trying to optimize, Kwantsar said:

Not exactly. Pull up your favorite growth calculator, and tell me the difference over 40 years between 10% and 7% rates of return.

Okay — pull out your calculator and tell me the difference over 40 years between 7% and 0%.

You're right that there are differences in rates of return. No question. But Phearlez is right: it's far more important to actually begin investing than it is to dink around worrying about minutae. (And I believe that attempting to optimize is minutae.) Later, when you've been investing for some time, and have found a competent advisor, then you can go in and optimize your investments.

But Phearlez is correct: it's far more important to start now than to wait and be perfect.
posted by jdroth at 1:53 PM on August 28, 2006

They already have your money, and their profit is built into management fees, so they don't have any incentive to push you into one investment over another. So call them and get whatever advice they have to offer. You generally start by deciding how much risk you are willing to tolerate, against potential growth. With employer matching of any sort, the key is to participate - it's like getting a raise.
posted by theora55 at 2:34 PM on August 28, 2006

krautland: It appears that you and I work for the same holding company, and I believe we have the exact same retirement plans. Feel free to e-mail me if you want more detailed suggestions; my address is on my profile page.

But at an absolute minimum, save 6% in your 401k to get the matching 4%. Even if you won't get it this year (I was in that position last year), do it now -- that way you'll never miss that money in your paycheck.

Don't invest in company stock in your 401k, for two reasons. One, it makes you too dependent on the company (too many eggs in one basket), and two, you can buy the same stock at the 15% discount outside of the retirement plan. So why pay 15% more than you have to?
posted by pmurray63 at 2:57 PM on August 28, 2006

krautland: To answer your latest question - no, changing companies should not influence you at all.
However, you will need to find a place (or places) to "roll over" those investment as you move from company to company. It can be risky to leave it with your former companies - some will charge a fee to manage the account, and if the market tanks, and they're charging fees, your money can disappear over time (I knew someone who had this happen!).
I am more risk-averse than you, so I created a rollover account almost 15 yrs ago with Dodge and Cox, and whenever I've left a job I've rolled my vested amount into those accounts (I have two, one in the Stock fund, and one in the Balanced fund). D & C performed much better than any of the picks in my previous employer's plans, and it gives me one place to track my retirement money.
posted by dbmcd at 3:24 PM on August 28, 2006

folks - I just wanted to thank everyone who offered their advice. you have made this a lot clearer and less intimidating already (feel free to add more though, I am still interested) and I have since recommended this thread to friends who had similar questions. it's a great example of what makes mefi so great.
posted by krautland at 8:53 PM on August 28, 2006