Deciding how to invest your money is a process, not a one-time decision. You can turn to books and articles for insight, but money is personal, and one size does not fit all.
For example, portfolio allocation is a simple concept; the complexity comes with your age, personal risk preferences and work retirement plans. So you may want help at some or all stages in your journey.
But what is worth paying for? Here’s what to consider before you hire someone.
Understand what you need
A free and simple program where you drop in your data online offers basic advice and is a good fit if you have only one financial goal, like saving for retirement. As you consider saving for competing goals like your children’s college education, a home and retirement, take the time to a professional who can help you balance your goals while creating financial wellness.
If you have a partner with additional goals, having an objective third party may be essential to setting priorities and working out a long-term money plan. Learning together is good for your finances and relationship
Another reason to consider professional help is if you want someone to calm you down when the stock market goes haywire and keep you on track to meet your goals.
If you are only looking for someone to manage your money and do better than the stock market, you may want to reconsider. Even the best professionals struggle to do this consistently. Beware of the fancy math tricks some use to convince you of their skill.
If you are looking for is help with your retirement plan, many employers offer advice through an Employee Assistance Program (EAP), or the investment firm handling the plan may offer seminars. Retirement plans have mutual-fund options that are targeted to match your retirement date, which is one simple way to invest.
Know your limitations as well as your strengths. Be intentional; break down your money questions into smaller decisions.
Overestimating your skill is what happened to a client who inherited $80,000 from a great uncle. Despite having no financial or investment background, he decided to invest the first $30,000 in three stocks that he believed in. By the time the remaining $50,000 came through six months later, that $30,000 had become $12,000. At that point, he knew he needed guidance and was willing to pay for a consultation.
Know what advice costs and how you are paying for it
Setting up an account may be free, but trades may cost you. All mutual funds have underlying costs, but those management costs and fees vary tremendously; be sure to compare expense ratios as part of your research, as some charge a “load”, or commission, when you buy.
If you hire a firm to look after your money, you likely will be charged a percentage of your assets under management (AUM). Generally, this is about 1% of your assets each and every year whether your investments go up or down. Depending on how much (or how little) money you have, a firm may send you to a junior employee – or decline to take you as a client.
A lower-fee alternative could be investment firms like Fidelity and Vanguard. They will help you come up with a simple financial plan and suggest mutual funds. A warning: the advice will be fairly generic, and their staff move around, so you may regularly be dealing with a new person. But you may still want to consider what they have to say, especially if the first consultation is free.
Then there are large full-service firms. Historically what they did was clear – buy and sell stocks. Now they earn all sorts of fees and commissions when helping you. Understand that salespeople go by many titles. Be aware of the myriad ways they may be getting compensated. Ask if you aren’t sure.
Depending on how much money you have or the level of service you choose, the investment advice you get may be online only. If you’ve gotten a free consultation elsewhere, perhaps from the company handling your 401(k), compare the recommendations.
Regardless of who you turn to, do some research before you hire a professional. Look for their education, registrations and background. State and federal websites show this information as well as if there are any complaints filed against them.
A client who loved her meeting with a potential new broker looked him up on BrokerCheck and saw he had worked for five companies in the past nine years. She wanted a long-term relationship and decided he was not the one for her.
Finally, most companies now charge you for transferring money out to another firm, so know the one with which you want to have a long-term relationship.
Find a fiduciary
If you hire a financial professional for investment advice, be sure that person is a fiduciary – a professional requirement to always act in the client’s best interest and find the best option for them, rather than the product that makes the investment advisor the most money.
Although “financial planner” is an unregulated term, all who have the title Certified Financial Planners are fiduciaries. They are trained in tax issues, insurance and cash flow as well as investments. A one-time consultation can cost between $150 and $400 an hour. This is one source for finding one who charges for services by the hour instead of getting a commission.
Just because you received investment advice does not mean the professional took into consideration your tax situation. Some seemingly sound investment decisions may not look so good after taxes. No one knows your taxes like your tax professional.
A tax professional will be especially helpful when deciding the type of retirement plan that is best for you and your future or how and when to turn stock options into cash. Before any major decision, connect with your accountant or meet with one for an hour.
If you are looking for an accountant, consider whether you need a CPA or an enrolled agent (EA) – someone who can offer advice, do your taxes and is registered with the Internal Revenue Service but generally costs less. But if your taxes are simple, you may opt to do them yourself.
Individuals overwhelmed by the idea of having money or making financial decisions may want to consult a financial therapist first. This approach worked for a client who lost her father suddenly. Along with the shock of grieving, she learned she had inherited $75,000. She felt overwhelmed, and money decisions were one thing too many.
A financial therapist who will talk through money issues, including your feelings around it and your family of origin’s background, may free you to take your next steps. You can find one through the Financial Therapy Association.
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CD Moriarty is a certified financial planner, a columnist for MarketWatch and a personal-finance speaker. She blogs at MoneyPeace.