Ask the Readers: Finding a Financial Advisor?
Wednesday, 14th February 2007 (by J.D.)This article is about Ask the Readers, Investing
Last week we helped a reader get started with stocks. This week Rebecca asks how to take the next step. Where should she go for help?
For my birthday this year my Grandmother gave me some stocks. She uses Edward Jones, but tells me that I can go anywhere. Would anyone be able to recommend a good “financial advisor” company? I’m looking for someplace:
- Local (in Portland, Oregon) or maybe something that has a good online interface.
- Friendly. I know nothing.
- Able to help me set up retirement accounts. Roth, Ira, 401k, etc. I have no idea what these mean.
The stocks are “Capital Income Builder” stocks, if that means anything to anyone.
It sounds as if the stocks are actually in a mutual fund, which is good. I have no experience with Edward Jones, so cannot comment on it one way or the other. I use Sharebuilder for my on-line investing, but they may not be the best choice in this case. I have friends who love E*TRADE and Charles Schwab, but again I don’t know how appropriate these are to a novice investor. Can anyone offer Rebecca advice?
First a side track: From what I’ve learned growing up (ok, well I’m only 22…but I’ve ‘grown up’ a lot when it comes to money over the past few years) the more you know, the less you pay someone else to know. As you mentioned, you and most of your friends use online services that require you to do the research and acquire the knowledge to be competent enough to invest without losing your shirt. So, the first thing I would recommend is to learn at least a little about money. Pick up a personal finance book or scour the internet. Even a personal financial adviser makes mistakes or bad calls or (hopefully not) decisions to better himself and not the customer. Its a lot like going to the store and paying cash for an item and making sure you got the correct change. You learned how to count, and therefore can make sure the clerk isn’t cheating you (or more likely making a mistake). AFTER you’ve acquired some knowledge about how mutual funds / stocks / money itself works, then I would recommend going to http://www.napfa.org/ and finding a personal financial adviser that is fee based, hence, wont be recommending a stock that the company has a big steak in or something, but you still have to be ever vigilant when it comes to your money.
Good luck, and never stop learning.
Here’s my tip on how to find a good financial adviser/planner.
The planner must always without question talk about STRATEGY first, as in what kind of investment strategy you need and will be comfortable with. Only after thorough discussions on this should the mention of PRODUCTS or PRODUCT PROviders be brought in.
If the adviser goes straight into … “you should invest with company xyz” walk away because they are just a salesman brainwashed by the fund managers.
Perhaps the most important question to ask ANY advisor is ‘How do you get paid off what I invest with you?’
Otherwise you can lose a lot of money in fees (MER for mutal funds) and not even understand how.
Check out the Fool’s school (http://www.fool.com/school.htm) for a basic overview of investing. Just ignore the ads for their newsletters.
Best of luck,
CD
Rebecca, my fear in this situation is that oftentimes finanacial “advisors” have incentives to push certain products/ideas even though they may not be the best idea for you at the time. While I don’t want to belittle any companies directly, one firm I was involved with offered their advisors an enhanced commision to push their clients into very large life insurance policies…much larger than needed. I fell into this trap, and I’d hate to see other repeat my mistake. I’ve since corrected my mistakes, but please heed Carl’s advice above and do your homework. Bear in mind that financial advisor’s are often motivated by commisions making them essentially salespeople (which references JD’s recent post on advertising).
Good luck with your investments, and please don’t rush into anything. It sounds as though you’re doing well and thinking of the future.
There are essentially two ways financial planners make their money- 1) commissions (they get you to invest in a particular product and earn a commission for doing so), and 2) fee-based (usually a percentage based on the amount you are investing or the value of your portfolio).
In my opinion, you should always go with (2), since there is less chance that the planner is pushing a product that you might not really need.
Second, any financial planner worth anything will first discuss your goals, and not in terms of money- such as, “What age do you want to retire”, “What do you want to do when you retire”, etc. Investment decisions should be made based on those goals.
If, by some chance, you are a Lutheran (or married to one or a child of one), consider Thrivent Financial. I haven’t used them for anything stock related, but my husband and I have used a Thrivent financial advisor for general “we’re just out of school, what do we do now?” advice, and he has never pressured us to purchase any particular products.
There are two broad classes of financial professionals, both of which are called advisers, but it is helpful to know the difference before you interview someone to manage your money:
1) Broker/Dealers execute trades and charge transaction fees or mark ups. Agents (the people who work for a B/D) offer advice on investments but the elephant in the room is that they often have incentives to steer you toward investments within their parent company.
2) Advisors and Investment Advisor Representatives who work them make their money on a fee basis, typically based on the assets under management. They don’t sell securities, they advise the client. In many cases they have discretionary trading authority to manage your accounts for you.
In both cases securities regulation forbids them to commit fraud, but the latter is held to a standard as a fiduciary — which means that an investment adviser proper cannot put his interests ahead of yours. In all fairness, agents of brokers (such as Edward Jones) are nearly all honest and fair minded so I don’t mean to say that one classification is right and the other is wrong.
An additional difference is how much money you typically need to have at hand to work with either. An adviser will typically expect you to have over 200k of assets, whereas a broker often will work with clients who have more than 50k.
Either way you go, I’ll second the wisdom of reading up a bit on personal finance in order to have a battery of good questions to ask any potential adviser.
I would strongly encourage her to avoid someone like Edward Jones. Edward Jones is a commission based company, and their reps are not certified. They are basically franchise owners of Edward Jones offices and they primarily sell sub par, front load mutual funds.
Edward Jones was involved in a huge lawsuit a couple of years ago for funneling their clients to only fund companies that were rewarding Edward Jones on the back end. These were underperforming funds to boot and front load.
I’d encourage her to start with an online brokerage account, say Fidelity, Vanguard, or Charles Schwab, and take it from there.
First she needs to get confident in saving, with a money market mutual fund, for example, and then confident in learning about investment options with what she has saved.
Maybe start with an index fund or an ETF, see how that goes, and take it from there.
Also recommend she start reading a basic finance book to get familiar with economics, finance terminology, and money management.
Even if she decides to hire someone to do this for her, which will cost her money and is not in her best interest, she still needs to educate herself so she understands what her financial advisor is advising her to do
Through my employer, I have the option of self-managing my 401(k) in a Schwab PCRA account. My opinion is they are a solid option for a largely self-directed investor, but with a few pitfalls.
PROS
–They have an extensive list of mutual funds that you can buy online which are no-load and no transaction fee. On the surface this is a nice feature. (Warning: There are also some funds available with a hefty $50 transaction fee — see CONS)
–You can set up an automatic investment purchase into your mutual funds (DCA anyone?)
–You also have access to the world of stocks traded on US exchanges (and a limited number of other exchanges, plus a boatload of ETFs (transaction fee per trade: $12.95)
–You also have access to a variety of CD, bond, money market, treasury, etc. options.
–You can buy CEFs! Including my favorite one that pumps out a monthly dividend. (transaction fee of $12.95 per trade)
–It has a nice web interface
CONS
–If you’re a buy and holder, the transaction fees for ETFs and stocks are palatable, but if you trade frequently this will bite you.
–My big disappointment: the Vanguard family of mutual funds as well as the T.Rowe price family both fall into the “Transaction Fee” category — trading these mutual funds is NOT free even though they are no load. You WILL PAY $50 per transaction to buy any Vanguard or T. Rowe Price mutual fund. This bites since I really wanted to just sink my 401(k) into a Vanguard retirement fund (VFORX or VTIVX).
–Most Vanguard ETFs are available — which is a good thing! — just don’t forget $12.95 per trade.
–Of the index funds that are available as a no-fee option, I wouldn’t touch any of them with a 10-ft pole.
–It’s possible yet difficult to find a no-fee mutual fund with an expense ratio below 1%.
Anyway, that’s Schwab. In a nutshell it’s a good option if you want a variety of instruments to choose from and don’t mind the fees. If you know you want to stick with a specific family of funds (like Vanguard or T.Rowe Price), your best option would be to just open an account with them.
I can’t emphasize enough — you’ll need to watch fees with your Schwab account.
I can’t speak to account minimums at Schwab since I was automatically eligible for the PCRA account. In the future if I leave this job, I plan on taking my PCRA right to Vanguard as a rollover IRA.
My Roth IRA is at T.Rowe Price and I really like them.
DISCLAIMER: I am a financial advisor, but I have no affiliation with any of the websites or companies mentioned below.
Carl made a very good point that “the more you know, the less you pay someone else to know.” Even before knowledge about money comes knowledge about yourself. What is it that you hope to gain from hiring a financial advisor? What are your major financial goals? You mentioned retirement, but you also mentioned a gift from your grandmother, which leads me to think that you are (at least relatively) young. Do you have other goals (pay down student loans, buy a house, build a cash reserve, etc.)?
Then, learn some money basics. You can find lots of free articles at sites like Yahoo! Finance (http://finance.yahoo.com) and Morningstar (http://www.morningstar.com). At that point, you can decide if you just want a broker (it is probably cheaper if you go with an online service like Charles Schwab or ShareBuilder), or if you want the additional service of a financial advisor.
“–My big disappointment: the Vanguard family of mutual funds as well as the T.Rowe price family both fall into the “Transaction Fee” category — trading these mutual funds is NOT free even though they are no load. You WILL PAY $50 per transaction to buy any Vanguard or T. Rowe Price mutual fund. This bites since I really wanted to just sink my 401(k) into a Vanguard retirement fund (VFORX or VTIVX).”
Point of clarification. I believe that this fee is paid to Schwab, not to Vanguard or T Rowe Price. I’d bet that very few of the readers here actually have the option of a self-directed 401(k) from Schwab. I buy (non 401(k)) funds directly from T Rowe Price and Vanguard and have never been charged a transaction fee. That $50 fee seem awfully steep, if you’re investing on a monthly basis.
I would highly recommend shopping around. I found my financial advisor by meeting with several and choosing the one who made me feel like I wasn’t an idiot. He walked me through every single step, definition, process until everything was set up and has been proactive with changes and modifications that will help my portfolio grow in the future.
My advise: shop around!
Rebecca,
“Friendly. I know nothing.
Able to help me set up retirement accounts. Roth, Ira, 401k, etc. I have no idea what these mean.”
Get yourself an educational foundation in investing first. You won’t know if a financial advisor is right for you unless you have a good idea of what you want in life, what your risk tolerance is, etc. JD recommends several books, any of which could get you off to a good start.
With regard to the stocks your grandmother gave you, I’d guess that you’d be better off focusing on investments for growth rather than income at this stage in your life, especially if these stocks are held in a taxable account.
gmv, what are the specific index funds you “wouldn’t touch with a ten-foot pole?”
As a Software Developer, I am quite picky when it comes to interface. With that said, the more and more I use my Ameritrade account, the more and more I find it very easy and help.
It is one of my top ten interfaces I have seen, up there with anything Apple and Google have put together.
Then again, I only other system I have used is Raymond James and it is horrible.
The worst advice I got was from an Edward Jones rep. Just terrible, terrible advice.
I eventually settled on Vanguard, which you can simply call up and tell them your plight/position and they’ll help you along and suggest what funds you should start with them. They seem like the only ethical game in town.
I think everyone is jumping the gun here. Although the original question asks about finding a “financial advisor” it doesn’t sound to me like that’s what this person needs just yet. Other comments here are already talking about trading/investing, products, commissions, etc.
It sounds to me like, short term, all this person needs is an account in which to receive the stocks gifted by grandmother. Assuming the amount of the gift meets the account minimums, there’s no reason why it can’t sit in an Edward Jones account. FOR NOW. That’s what grandmother has, so that’s probably the easiest, no-cost, transfer of custody.
Another assumption, but unless the questioner needs to spend this money immediately she should spend a bit more time reading up on the basics until she gets to some more specific questions of what will be done with this money. The general questions of what the different types of accounts mean and some more terminology can be answered online from sites like this one. Once she has a better idea of what she wants to do, THEN it’s time to find someone who can make it happen, including advising on issues specific to this individual (such as other income, tax consequences, insurance, lifespan, etc).
I’m not trying to be insulting towards advisors, nor condescending to the questioner, but I think it would be a mistake to go to a financial advisor for basic education.
I was in the same spot a couple years ago but managed to educate myself to the point where I felt confident investing on my own without a financial adviser. Whether or not you decide to seek one out in the end, there are ample free resources online that will help you get up to speed on some of the basics before you talk with someone.
Two posts on this site (http://www.getrichslowly.org/blog/2006/10/02/an-introduction-to-mutual-funds/ and http://www.getrichslowly.org/blog/2006/11/06/intro-to-mutual-funds-index-funds/)
by VinTek were a great starting point.
fool.com has great, simple explanations of everything investment-related. I learned a lot there.
Vanguard.com has an amazing website. I ended up starting an account with them because they offered so many resources on deciding how to invest. (And they do not charge you $50 to buy mutual funds. I think it was $10 to start my Roth IRA.) Vanguard is well-known for their low expense ratios (much lower than Fidelity or Schwab or any of the big brokerages).
Good luck!
Disclaimer: I am a financial planner and Investment Advisor Representative (IAR) of my own Registered Invemstment Advisory firm, licensed in Oregon. The difference between IAR’s and Registered Representatives (RR) (all advertising, business cards, etc. must indicate which) is that the RR’s financial obligation is to his/her broker/dealer. IARs’ fiduciary responsibilities are to their clients. The commission/no commission debate is virtually irrelevant. Some excellent products, like the American Funds Capital Income Builder fund that the questioner inherited, pay commissions. Many terrible funds are no-load. If cost were the only factor we’d all be driving Yugos.
There are crooked IARs just like there are crooked RRs. So instead focus on quality. Most state insurance/securities departments have online databases showing complaint & regulatory history of advisers. Having said that, it is obvious that IARs would not have the temptation of offering an inferior product because it paid high commissions.
A good financial planner will ask lots of questions and take notes: “know thy customer” is the cardinal rule. Cutting edge planners will give you a free CD on which to record all your goals, financials, etc. which can then be plugged into comprehensive planning software. Even if you don’t proceed with a comprehensive plan, this is a good exercise. You can’t get to where you want to go unless you know where you are!
A good planner will also find out what you want to do with your all too brief life here on this planet. Maybe instead of buying stocks you should go back to school, or hire an assistant or buy a home or take a trip on a Harley or give it all away. The planner’s job is to help you realize your dreams. Your life is not a math problem.
Vintek -
You are absolutely right — that $50 fee is paid to **Schwab** — NOT to Vanguard or TRowe Price (or the other companies where this fee is assessed). Sorry if I didn’t make that clear. If you delve into the fine print it seems to be the cost of having Schwab handle the paperwork for you. Probably they couldn’t/wouldn’t strike up a partnership with the companies in question. (Fidelity is another one where I think this transaction fee applies — maybe its a competition thing.
Patrick — some of the index funds I wouldn’t touch with a 10-ft pole are the Schwab index funds themselves (and Morningstar favors my point of view that these funds are a bit lackluster PLUS most of them have ERs of .50% - 0.75%. Also I’m not so thrilled with the Dreyfus funds. Beyond that none of the index funds I looked into were all that great so as to have their names stick in my memory — as much as anything because their ERs were really not that much below some of the managed funds (such as BEQGX, which I like).
Others may disagree that Schwab and/or Dreyfus are great. I spent a lot of time on Morningstar trying to figure out an index fund scenario I liked, and I tried the Schwab index funds for a little while but for the effort I would have been better off just staying with my regular 401(k) options.
I’m not a financial advisor so don’t take any of this as a recommendation, it’s just my opinion.
gmv
P.S. — I know many don’t have this sort of option in their 401(k) — my point was to share my impression of Schwab though. Again, it’s a decent choice, just know its limitations. I’d certainly choose Schwab over Edward Jones!
When people turn to advisors they are usually vulnerable and anxious to catch up on their finances. Advisors know this and those who are more of the commission-driven salesman type will lock them down in expensive products that have severe penalties for pulling out.
Anyone in this situation must pause, read some books and become at least reasonably literate about personal finance before committing to any long term products and costly strategies. Within a month, with a few books read, you will be on far better grounds. The, if you still need an advisor, you will at least have the tools to evaluate good ones.
Long time lurker, first time commenter on this blog… I agree with the opinions that you can become your own financial planner relatively easily, and in those areas you do need help, finding a fee only person is the way to go.
I personally have accounts at Vanguard, Firstrade, Sharebuilder, and TreasuryDirect. If I could only choose one it would probably be Vanguard, but all of them have their virtues.
I’ve had about two years of experience with Edward Jones, and I think the individual experience depends a lot on your local rep. I really like mine, and he’s great for my retirement plans (which are 100% mutual funds). Every time I see him, he makes me feel great about saving.
I understand people don’t like front-load mutual funds, but they do pay off over the longer term. Class A shares of a mutual fund usually have a stiff sales fee up front, which gets discounted as the amount of money you invest increases (usually at $25k, $50k, etc.). This is offset when you consider holding the funds for a long time (10+ years), since Class A shares have the lowest annual expenses of any share class.
Edward Jones is completely wedded to the buy-and-hold strategy, and discourage their clients from active trading. Their stock commissions are really high ($50 or 2% per trade). As I grow more comfortable owning individual stocks, I’ve been looking to open a ShareBuilder or Zecco (free trades - woot!) account for the smallish purchases I’ll make for my “fun” investing.
Hello,
I am the person who originally asked the question. Thank you for all your responses. There is some good stuff here.
Tinyhands: Your advice was right on. The rest of the advice was good, and I will be starting to research some things, but as for right now, I need to get that into my name so my grandmother will stop bugging me about it!
Gary Duell: Are you based in Portland? Do you think you would be a good fit for me? I like some of the things that you mentioned.
I did forget to mention in the post that I am 23, and have no savings yet whatsoever. In the last year I have been paying off credit cards rapidly, so as soon as I am done with that (another year), I will take advantage of the 401k at work and have money taken out of my paychecks.
Thanks again,
Rebecca
Some financial advisors, called certified financial planners , have taken about 300 hours of instruction, taken an all day exam, gotten at least one years experience in the field and signed a pledge of ethical conduct. Only 5% of financial planners have formal education in the field. You can find a certified financial planner in your area by going to the website http://www.cfp-board.org
In an article published last year in the Wall street journal in february , 2006 they talked about the questions and info you should request from any financial advisor. I will summarize:
1. Do you act as broker or registered investment advisor or both? (sometimes they “switch hats” .)
2. Do you have a fiduciary duty to look after my best interests and are you willing to sign a statement to that effect?
3. What credentials and experience do you have?
4. Have you ever been cited for a profssional or regulatory violation? By anyone or by any government agency or by any individuals or corporations, groups or partnerships?
5. How are you compensated and how much?
Ask to see the ADV, the investment advisor registration, all parts.
The cfp website has more stuff, questions to ask, etc.
A registered investment advisor is not necessarily the same as a certified financial planner.
Other credentials that signify formal education , training and pledges of ethical conduct besides certified financial planner are:
chartered financial consultant
chartered financial analyst
CPA-personal financial specialist
In response to Rebecca’s inquiry, I don’t know if it’s proper to turn this blog into a buisiness contact medium. But the purpose of it is to benefit the participants. I am in Portland metro., my website is wwww.garyduell.com, & phone number is 503-698-4812, Rebecca. If the site administrator finds it necessary to delete that info., just do a search for my name, GaryDuell. Or, I’m in the phone book.
I would be glad to spend some time on the phone with you, no charge.
I also wanted to differ with Tolak’s completely unfounded supposition that the people who turn to a financial adviser are “vulnerable” and “anxious”. I would be interested in seeing the survey or study from which that conclusion was drawn.
In my experience, people turn to a financial advisor with similar motivations that send them to the dentist for their annual exams and cleanings, to the doctor for their prostate exam or Pap smear, and to the mechanic for their vehicles’ 3000 mile oil changes. Hardly ever is it out of anxiety or desperation. If it were, 1000% more people would be running to financial advisors!
As it is, the public at large dreads not only assessing their financial status but are also loathe to even consider changing their financial behaviors. The anxiety and vulnerability are real. But they block constructive action rather than precipitate it.
It looks like I stumbled upon this page a little late in the conversation. I am an advisor with Edward Jones. Your original question was similar to: what is local, has a good online interface, friendly, and can help you set up retirement accounts. Edward Jones, where your Capital Income Builder Fund is currently located bases its offices in local communities to promote face to face interaction and communication. Local? Check. Edward Jones, according to Forrester Research and others, has an award winning website. Online interface? Check. Edward jones is ranked “Highest in Investor Satifaction With Full Service Brokerage Firms,” acording to the J.D. Power and Associates 2006 Full Service Investor Satisfation Study. We are also rated highest in a trust survey by SmartMoney magazine (2005). Why do we get these awards time and time again? One reason is we tend to be friendly. Check. And, yes, like many, many other firms, we can help you set up retirement accounts. Check. If you have not already moved your funds, you should sit and talk with your Edward Jones Advisor and see for yourself why we win award after award. But, as one person mentioned above, people are different. The advisor and you may just not get along. In that case, choose someone else you feel confertable with. Sorry for the misspellings, I am a numbers guy, not a spelling champ. Take care, and I am sure you will be happy if you hold onto your capital income builder fund.
One small note (as I look down, I am realizing that the note gets longer and longer…)to finance girl (if she happens to check this blog again). Your a little off on your understanding of the Edward Jones situation. I would highly recomend you sit and talk with an Edward Jones Advisor, not to move your accounts over, but to get a better handle on what it is you are talking about. It also sounds like you are in the Suze Orman boat of never buy front load funds. There are great no-load funds and there are great load funds. There are also really, really poor funds in both categories. However, if you go through many of the quality funds on both sides (three or four star and up on S&P ratings or on MorningStar ratings), and compare average 10yr returns, I am sure that you will be surprised that you tend to be better off with funds that have a sales charge. Nevermind investing in any index. However, one thing to point out is that an advisor can be a highly valuable asset. Let’s see if I can remember this right: over the last twenty years, the S&P500 has returned an average annual return of a little over 11%. Over the same period, individual investors have only averaged a little under 4%. Why? Many of these folks jump in and out of their investments because their emotions get the best of them. They end up buying high and selling low (chasing the market); not a good way to make money. When an advisor can help people navigate these tides and help investors hold on to their quality investments in poor markets, then the advisor is adding value for the investor. Now, a quick note on paying wrap fees of a percent or two a year vs. a commision (granted, there can be a conflict of interest when commision is involved). Would you rather pay a one time fee of x% and be done with it and own your investment, or would you rather pay y%, compounded year after year after year (in effect, paying for your investments for the rest of time)? Just a thought.
[...] her much happier than if she were to pick investments on her own. Earlier this year, I published a reader question about finding a financial advisor. In April, Dylan shared a guest entry explaining when and how to hire a financial [...]
If you are transferring stock that is owned by your grandmother, to your name, consult a CPA on figuring the cost basis for income tax purposes. If its a small amount it will not matter. If its a large amount, the cost basis is figured on what your grandmother originally
paid per share plus expenses. If its inherited the cost basis becomes the value when inherited. This can create a large tax liability in some situations.
I have Capital Income Builder Shares. My dad has an advisor at Edward Jones. Since he invested a lot I do not pay a fee to buy. The Capital Income Builder is a very good fund. If you want something comparable, Vanguard has the VWELX the wellington fund. However that requires 10,000 dollars of an initial investment.
My firm (ClaroConnect.com) matches investors just like this to financial advisors. Our website has a free, unbiased search tool to screen through advisors by location, specialty, qualifications, fees, etc. exactly as you requested.