I’m really going to stir the pot with this one. There are certainly times where you’ll need the advice of a real investment professional – especially once you’ve accumulated a sizable nest egg. But, if you are just starting out or are in the “growth” stage of life, should you pay for investment advice? My answer: you most likely shouldn’t be.
Here’s my reasoning as to why you should go it alone on the investment road as opposed to paying high dollars to a “professional” to help you get your retirement funds in order. And I’m ready for the comments on this one.
Expense fees are numero uno. Even the guys that rate mutual funds, Morningstar, have admitted that the fees are more important than their star ratings. Back in 2010 they released a study and the author stated that “if there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds.” Wow. Low cost mutual funds and ETF’s are certainly the way to go. Those “professionals” will eat up a bunch of your profit with their commissions and fees. That is why I recommend companies like Vanguard, Fidelity, and Schwab. They make low fees their highest priority which means you keep most of the gains – not someone else.
Target retirement funds make it easy. I’ll admit, looking at 300 fund choices is a bit scary. Low cap. Mid cap. Growth funds. International funds. Eesh. Where do you put your money? Well it is much easier to figure that out these days thanks to target retirement funds. They are a boon for novice investors and can really help you avoid the giant fees for advice. You’ll want to figure out a likely retirement date (Mine is 2055 – writing that in 2013 is actually mildly depressing). Anyway, this will help you decide which target retirement year is best for you. Put your long-term money there. The bigwigs at the company you have your money with will re-allocate your dough over time so you’ll be widely diversified and in sound investments for your age. That means that you won’t be 100% in stocks at age 60 because you forgot to switch things around. It’s basically the autopilot solution for your retirement.
Two Simple Vehicles. If your company offers you a 401k then start putting money in. If they match your contributions then make sure you are taking full advantage of that. The 401k with a match (into a target retirement fund obviously) is the single greatest investment you can make. In most cases you are making a quick and easy 3% because of your generous employer! If you don’t have access to a 401k, or even if you do but are already investing up to the match level, your next best option is the Roth IRA. Here’s a poem on the Roth from my friend Stephanie that outlines all it’s glorious benefits. These two easy to access retirement vehicles soak up most people’s retirement funds.
The decision ultimately comes down to your comfort level. If you feel more comfortable talking to someone who’s been trained to make your money grow that is totally understandable. I promise I won’t judge. Just know this. Paying 1% less in fees and commissions could result in a 20% larger retirement fund 35 years down the road. So if you really feel the need to talk to someone. If you don’t feel comfortable going it alone – then speaking with a fee only financial adviser is the way to go. They’ll charge you an hourly rate to assess your situation and give you advice accordingly. The major benefit to this is that they aren’t putting you in high commission funds just to pad their pockets. Check out Napfa.org to find an advisor near you.
One of the perks of being with Vanguard is that if you have over $50k in retirement accounts with them you can get a check up with one of their professionals for a flat fee of $250. That’s pretty awesome.
If you want to get a little more fancy you are more than welcome to try your hand. When it comes to investing I am boring. Very, very boring. Don’t worry, I more than make up for that in other areas of life. Low costs and diversification are the most important things for me.
Know this – if you can do your own pest control you can definitely handle your investments for the future on your own. The suits on Wall Street want you to think that this is rocket science and you can’t possibly go it alone. That just isn’t true. Plus, if you go the DIY route you’ll have more money to show for it come retirement!
Are you taking the do it yourself route to investing? Or do you think I’m way off base? Let me know!
[photo courtesy of PJ and Jonathan]
10 Comment responses
Absolutely agree with the first observation, fees, as a reason not to use a financial advisor. If people really understood the negative impact of fees, they would be a lot more likely to educate themselves and manage their own portfolio. If an advisor is being considered, I usually have a couple of caveats. First, if someone is looking for guidance, they should seek a fee-only, vice a fee-based, advisor. Second, the advisor should be licensed/certified in the discipline they are looking for specific guidance (e.g. CPA for accounting). I am considering using an advisor when I get within five years of retirement as kind of a sounding board for my withdrawal plan, but unlikely to seek any counsel until then.
Until that Morningstar study came out I didn’t understand how devastating fees are to a retirement account James. I knew they were harmful but I didn’t know they were by far the most important factor in deciding where to put your money. And I totally agree. If you want advice go fee only.
Joel, When you have an hour, check out ‘The Retirement Gamble’ from PBS http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/ – where it can be streamed online. Also available at Amazon.com. A great illustration of the impact of fees.
Will do James. Thanks!
I agree with everything that you said except “There are certainly times where you’ll need the advice of a real investment professional – especially once you’ve accumulated a sizable nest egg.”
When I began investing in the early 1990’s I bought two books: John Bogle’s “On Mutual Funds” and “Mutual Funds for Dummies”. Total cost, about $25. That is the sum total that I have spent on investment advice in the last 20 years – and all that I have needed.
So, now that I have accumulated a “sizable nest egg”, why should I pay a “real investment professional” 1% or more per year of my sizable nest egg? If a person does as you recommend and manages their own funds in the “growth” stage of life, I believe that they will learn enough about investing that they will not need a “real investment professional” later on when they have accumulated that nest egg.
Thanks for your comment Mike. I totally agree with your sentiment. I will personally handle all of my own investments and hope to never pay anyone to assess my situation. If for some reason I do feel the need I’ll sit down and pay a fee, not a percentage, to someone for their wisdom – or pay Vanguard $250 for some advice.
I think for most folks it comes down to confidence level. Not everyone is like you and I. They just don’t have the faith that they can handle a giant pile of cash for retirement that well on their own. For them a fee only financial advisor is a great asset. But I look forward to the challenge, and opportunity, of saving that cash and going about investing the DIY way!
I understand your comment about confidence level. The first time I sent money to a mutual fund, it was an act of faith that this investing thing would really work out. I guess my thought is that you don’t start building that confidence level until you start investing on your own. Confidence is something that anyone can build by doing, and if they follow your advice in the early years, they may not need an adviser in later years.
Mike, Interesting that you mention Mr. Bogle. He appears in the PBS documentary I referenced earlier. You might be interested in checking it out.
I saw that documentary, and agree with you that it is well worth checking out!
For anyone else reading here that does not know who this “Bogle” is that we are talking about: John Bogle founded Vanguard Funds, and was the pioneer in developing and offering index mutual funds to the investing public. In my opinion, he has done more for making investment accessible to us ordinary middle-class humans that any other person ever.
I totally agree Mike.