Choosing a Financial Advisor

Many people manage their own finances from top to bottom. Others employ the help of outside professionals, whether advisors who provide annual or semi-annual checkups for a flat fee, or money managers who make the actual day-to-day investment decisions for their clients' portfolios in return for a percentage of the portfolio value. And unfortunately, the vast majority of people fail to seek any outside advice or hardly apply any strategy to their investing.

The choice you make depends mainly on:

1) How much time are you interested in devoting to your investment strategy.
2) How much experience you have in investing.
3) The value of your portfolio.

For those who are just embarking, an initial visit to a low-fee advisor is recommended to get you started on an organized plan. This visit can help you manage and eradicate debts, plan savings in a cash reserve, a 401(k), and an IRA. Most will measure your risk tolerance, calculate asset allocation based on your age until retirement, and figure how much money you will need in retirement to maintain your current lifestyle. Depending on the level of service you can expect to pay from $1000 for this consultation.

You can do your own research and management following this visit, or if you prefer a hands-off approach and have little investing experience and a relatively small portfolio (under $100,000), most will do well with an occasional consult with their advisor to update their investment strategy, rebalance their portfolio and asset allocation. There are various investment products, that automatically do these kinds of rebalancing and reallocation, but researching them and selecting ones with good performance is sometimes best left to an advisor, again depending on how much involvement and time you want to dedicate to your strategy.

Lastly, for higher net worth individuals or those not interested in contributing at all to the management of their portfolios, an active portfolio manager can be a good option. Generally, large banking institutions require a minimum portfolio value of $250,000 or more to use this service. In most cases, your money will be allocated into pre-designed formats matching your retirement and risk tolerance. While this makes it seem as if you are getting unique and individual attention, your money is really being grouped with that of similar clients. Most find that the performance of these institutions generally beats market by a few percentage points each year, however, the management fees are generally very high, 2.00-3.00%, or even more. This is much higher than the fees of most mutual funds (1.00-1.5%), and much steeper than those of index funds (0.19-1.00%). More often than not, the increased fees wipe out the benefits of the market beating performance.

In the table below, note the effect of management fees on an IRA over time, especially the difference between 1% and 3%. Fees are a part of investing advice, but you can realize much more from your investing by selecting an advisor and investments that have your bottom line long term portfolio value at the forefront of their interest.

Initial Investment Strategies Series: Have a Cash Reserve

Our public high schools and colleges offer a bouquet of courses on accounting, finance, and business. But often we find that even graduates from within those fields lack the skills necessary to plan their own finances appropriately. Also, few families have or pass the knowledge that any Certified Financial Planner would impart to each of his or her first-time clients.

This is the first in a long series of Initial Investment Strategies. Apply these concepts and strategies when looking at your financial picture:

The first recommendation is to have a cash savings of at least 3-6 months living expenses. Some planners even recommend a 9 or even 12 month reserve. This protects you and your family in the event of a life changing event: loss of job, tragic accident, etc. Having a reserve eliminates the paycheck to paycheck living and it's accompanying stress. Consider storing these funds in something other than a simple savings account, which may only pay 1-2% interest. ING and Citibank both offer competetive rates, 4.4% and 5.0% respectively, while a more hands-on and shrewd strategy of revolving CD's (Certificates of Deposit) can bring better rates while maintaining access to cash. For example, a 6 month reserve can consist of 6 seperate CD accounts, each set to expire one month after the previous. When the CD matures (expires) you simply do nothing, and the interest will be reinvested for another term, growing your savings.

Check out http://www.bankrate.com/gookeyword/rate/dep_ratehome.asp?params=NY,2&product=14 for a listing of CD rates in your area, or drop by your local bank. In New York, First Horizon Direct is offering 5.27% on 6 months CD's with only a $1000 minimum.

Keeping a Financial Journal

Often I am approached by friends, colleagues, and relatives for suggestions on how to achieve numerous financial goals. Whether it be getting out of debt, planning for retirement, saving for a vacation or a new 60" plasma my first response is always the same: What is your current financial picture? The most frequent answer - Um, I'm not sure.

So many of us have very little knowledge of our financial picture. A picture is more than just a general awareness of what we can expect from the next 6-12 months relative to our income and bills. It is a clearly documented history of where we are now, what has occured in the past, and especially what is expected in the future. Most live in the moment and have yet to muster the discipline necessary to plan ahead financially.

There are many tools available to start making any financial decision stress-free, and any computer owner probably already has a form of money tracking software. I highly recommend Microsoft Money for individuals, couples and families interested in getting a firm handle on their entire bouquet of accounts, or for any beginner with 1 or 2 open accounts. My sister even has a seperate file for her 6-year old daughter to track college saving plans.

Microsoft Money 2007 is currently offered as a free 90-day trial at http://www.microsoft.com/money/freetrial_info.mspx Thereafter the Deluxe version is available for $30 after a $20 mail-in rebate. For those doing a lot of investing, splurge for the Premium edition ($50 after $30 mail-in rebate).



It's great for tracking all of your regular bills, adding one-time expenses, forecasting on-hand cash flow over time, interfacing with online accounts, forecasting next year's taxes, etc. It even has a debt reduction planner, a life planner, and an extensive list of reports to keep you well informed of you spending habits and other trends.

For small business I would recommend Quickbooks by Intuit http://www.intuit.com/ as that is the industry standard for most accountants and CPA's - whom you can expect to service your tax reporting needs throughtout the year.

Regardless of what financial goals you are interested in, a solid 'snapshot' of your status is required to make intelligent, appropriate, and safe choices. Remember that acquiring the software is just the first part. Regular use, input, and account reconcilation is key to accurate records. Set aside an hour once a week, or a couple every month to keep up to date. You'll find that knowing where you stand brings comfort, security, and will enable you to confidently make important choices about your future.