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.