Getting competent help can be hard. Hiring a babysitter, vetting a lawn service, figuring out which plumber is going to fix your leaky pipes for a reasonable fee. Same for finding a financial adviser.
You can spend some serious time trying not to get ripped off over simple problems. Getting help around the house is important, but your retirement is crucial.
It’s also a big subject to tackle, so many folks like the idea of farming out the details to a financial adviser. That’s all good, but it’s important to understand some basics here. Who are you hiring and why?
It breaks down like this:
Bankers — You can get decent advice for free from your local bank officer. He or she is likely to be a straight shooter and very generous with his or her time, but any product you buy will benefit the bank first and foremost. Their job is to attract deposits and sell interest-earning loans to you, the customer. Whether those products are competitive in the marketplace is secondary, from their point of view.
Brokers — Stockbrokers once performed a vital task, giving ordinary people access to stocks and bonds. But remember, brokers work for the big banks that help companies issue stock, so there’s a built-in conflict. They also earn commissions on volume sold, so that’s strike two. It’s “free” advice, but not necessarily in your interest.
Insurance policies — Insurance companies make money by investing the premiums you pay, known as the “float,” while they wait for the eventual disaster or death upon which they must pay claims. Since they’re investing anyway, some insurers offer customers a chance to co-invest though specific types of policies (essentially, anything not called “term life” insurance.) It’s not a bad way to invest, but it’s a needlessly expensive way. They earn a return on your money and give you a slice, keeping the rest.
Advisers and planners — Also known as “wealth managers,” these folks do a variety of tasks, ranging from helping you make serious decisions about taxes, insurance and estate planning to simply managing your investments. Some charge an hourly or flat fee for service. Others prefer to scale their fee as a percentage of your total assets.
If you use a financial adviser, that’s the benchmark — the percentage fee. If your adviser is helping you work up a serious plan with lots of pain points, pay them an hourly fee for this work.
If instead they want a percentage of your assets, continuously, forever, no problem. Just ask first for to see their updated Form ADV 2A.
This is the SEC-required form that spells out their fee in plain English. It shouldn’t be more than a couple of pages. They are required to give it to you.
Here’s the benchmark: Major pension funds generally charge their participants less than 1% and the best are at or just above 0.5%. Bizarrely, wealth managers charge up to 2%, while many financial advisers fall somewhere between.
None of this takes into account commissions or additional fees paid for actively managed mutual funds. Figure out where you fall and ask yourself if you get service that matches the cost you pay.