The answer should be easy. Obviously you are the person who should be paying attention to your portfolio, understand how your money is invested, and monitor its gains and losses. But in these times of low interest rates, mixed markets, and changing tax laws, many people, retiree and pre-retirees alike, seek guidance. They have many places to turn for help, including both robotic DIY advisors and a growing number of firms and individuals working as financial advisors and money managers. All are more than willing to provide guidance — for a fee.
If you are among those who would like some guidance, self-education should be your first step — unless you already know the terminology, understand the principles of investment and how markets work. If you are not sure, take a financial literacy test to see where you stand (for starters, visit FINRA website). If you need help, Great Courses has a number of offerings that would bring you up to speed, as would any number of books and online sites.
Armed with at least a rudimentary understanding of how it all works, you might want to hire a financial advisor/money manager. Many are available, some working with banks or investment firms, some on their own. If you read the newspaper, check your email regularly or watch television, you no doubt have seen their solicitations. As with any such personal service, some are excellent, some good, some marginal and some, no doubt, only there to take your money.
So you need to be careful where you look and whom you choose. You want an advisor who is honest, trustworthy, experienced, transparent, available, and ethical with a solid track record. You also want someone who shares your goals and values, not just the money to be made from advising you and/or managing your funds.
Robotic versus Human Advisor
If finding an individual or firm with all of those qualities seems overwhelming, you might prefer an automated investment service, a robo-advisor, to manage your finances. With any automated service, you will be asked about your age, your investments, your income and your risk tolerance. Armed with your answers, a web-based algorithm, such as Betterment, FutureAdvisor, Vanguard Personal Advisor Services or Wealthfront, will take over, creating personalized asset allocation, and making recommendations for low cost EFTs (collections of stocks and bonds) or mutual funds. The system will rebalance your portfolio automatically so it stays diversified and will reinvest your dividends.
All of this is done without human intervention, including yours. If such an automated service sounds tempting — it does relieve you of the burden of finding an honest, experienced, ethical human to advise you — you should be aware of the significant differences in the products offered by these automated services, the fee structures and the types of accounts that are available. and choose accordingly.
If You Want Some Human Input
If the automated, robotic management is simply too impersonal and you decide to find a human advisor, either an individual or a firm, the following suggestions should help your search. First you need some candidate advisors. After sifting through all the ads and solicitations, ask family, friends, business colleagues, essentially everyone whose judgment you trust and who seems financially stable, for recommendations.
Once you have a list of possibilities, you need to do some background checks to discover any compliance or regulatory problems. Start with https://www.cftc.gov/check where the Commodity Futures Trading Commission has bundled major regulators online. You also can consult BrokerCheck, a free online tool offered by the Financial Industry Regulatory Authority, FINRA, for current licensing status and employment history as well as any regulatory actions, consumer complaints or criminal convictions. (Another option is FINRA’s BrokerCheck hotline, 800-289-9999, where you can verify current certification and discover any disciplinary action.)
As part of your background check, you also should see both parts of a prospective advisor’s form DV on the Investment Advisor Public Disclosure, or IAPD. This lengthy form is used to register investment advisors with both the SEC and appropriate state securities authorities. It provides information about the advisor, services and products offered, fees, and any potential conflicts of interest.
Having eliminated potential problems with your background checks and keeping in mind the honesty, integrity, experience, availability, and the other qualities you seek, you are ready to meet with the most promising candidates. You don’t need a script for this meeting, but you do need a mental check list of the questions and concerns that need to be addressed.
- How will your prospective advisor/money manager be paid? Advisors usually make money through a commission on products sold or a set fee based on a percentage of assets managed on your behalf, sometimes by a combination of the two. A commission, based on the sale of certain products, may skew advice in favor of those products while a fee, based on a percentage of your assets, can inspire aggressive management of your funds regardless of your risk tolerance. You need to know how the advisor makes money, if fees are tied to performance of your assets, and whether fees are negotiable.
- Is your prospective advisor willing to make a preliminary evaluation of your current financial situation, discuss your investment goals, assess your risk tolerance, and possibly make some recommendations that match your objectives. Ideally this should be done without a fee, but realistically you might pay a minimal upfront fee of maybe $200-400 to give you a solid basis for assessing how this prospective advisor would work with you and, most importantly, whether your goals and interests are a primary concern.
- What training and experience with different financial instruments does the candidate have? Has the prospect been through several market cycles with upturns and downturns? What do the advisor’s services include? Only portfolio management, or wealth management, estate planning, help with generational transfers and other services? Can the candidate determine the risk level of your portfolio and know how to diversify your assets to minimize risk of large losses? Ask for references and interview some of the prospects’ clients to get a sense of whether their interests and goals come first or whether income is a driving motive.
- Since what counts in the final analysis is how much you keep after paying taxes, does your candidate understand taxes and ways to minimize what you pay, maybe by repositioning your assets between taxable and non-taxable positions to take advantage of current laws? Both you and your advisor need to understand the impact of the tax code on your investment decisions, for instance, on the tax ramifications of owning growth funds versus income funds.
- Does your prospective advisor submit investments directly, or does a firm do this? Or, stated another way, would your prospective advisor delegate portfolio decisions to a firm, a process known as firm discretion? If that would be the case, you need to know what value your advisor serves. If the advisor is not overseeing and selecting your investments, does the advisor do estate planning or something else to earn a fee?
- Last, but may be most important. How well do you and this prospect communicate? You need a financial advisor who listens to you and understands your goals and concerns. Does this candidate answer your questions and address your concerns in an honest and straightforward manner, no jargon, no evasive detour, no avoidance of difficult issues? You want practical advice, comprehensible explanations and reassurance that your goals and your account is a prime interest. If you do not sense and receive this kind of support, this candidate may not be the advisor for you.
The Bottom Line
The decision on whether to manage your own retirement account, with or without the help of a robo advisor, or whether to turn it over to a financial advisor/money manager should not be taken lightly. Either way, you at least need to be familiar with the basics of investing and how markets work and, no matter who makes the decisions or does the actual investing, you need to keep track of your portfolio. Remember, this is your hard-earned retirement money, so you need to pay attention.