Ask Stacy: Do I Need a Financial Adviser, or Can I Manage My Money Myself?

When you’re sick, you go to the doctor. When your car dies, you find a mechanic. But when it comes to your money, do you really need a financial adviser, or can you do it yourself?

Here’s this week’s question:

Do I really need a financial adviser to handle my money, or will I do just fine in a low fee Vanguard [mutual fund] or something similar?
— Robert

Before we get to Robert’s question, here’s a video we shot a while back at the New York Stock Exchange.

Now, on to Robert’s question.

Going it alone: penny wise, pound foolish?

Every year we cover income taxes, and every year, in stories such as “7 Tips to Find the Best Tax Pro,” we offer advice like this:

Remember, most preparers are simply entering your information into a software program. Rather than pay hundreds to someone else, you could spend a lot less and … do it yourself.

The same logic applies to managing your money. Money management isn’t rocket science. In fact, I’d consider it more basic than income taxes. Providing you’re willing to do a little reading, you can easily do it yourself. For example, let’s look at Robert’s case. Here’s what he might consider:

• Step one: Decide how much he can put into long-term savings. Long-term means money he definitely, positively won’t need for at least five years.
• Step two: Subtract his age from 100 and put the result as a percentage of his long-term savings into a simple, unmanaged stock index fund. So if he were 40, he’d put 60 percent (100 minus 40) of his savings into a fund such as the Vanguard 500 Index Fund or 500 Index ETF. (I typically suggest Vanguard because they’re low-cost. I have no affiliation with them.)
• Step three: Take the remainder of his long-term savings, 40 percent, and divide it equally. Leave half in an interest-bearing, risk-free savings account, put the other half into a bond mutual fund, such as the Vanguard Intermediate-Term Bond Index Fund, or an ETF.

He’s done. No pro needed.

If Robert is concerned about putting too much into stocks, especially all at once, he could invest gradually over time. If he feels that investing 60 percent of his long-term savings into stocks is too risky, he could choose to invest less. And if he’s confused by terms such as “500 Index,” “bonds” and “ETF,” he should read more.

Bottom line? Robert, and most other investors, can safely go it alone, provided they’re willing to do a modest amount of reading and research.

That said, there may come a time when anyone might consider seeking the services of a professional. Perhaps the amount of money involved is large enough to be intimidating, the options so complex you feel out of your depth, or you just want confirmation you’re on the right track.

Fine. There’s certainly nothing wrong with turning to a pro. There is, however, something that can go wrong if you turn to the wrong kind of pro. So let’s explore how to find the right kind.

What’s in a name?

In a past life, I worked as a financial adviser for several big Wall Street investment houses. While I called myself a stockbroker back then, those in the advice business these days rarely do. Instead, they use titles they presumably hope will convey trust: financial analyst, financial adviser, financial consultant, financial planner, investment consultant and wealth manager, among others.

When it comes to quality advice, these are all interchangeable labels. None requires any specific education, skill or certification. In fact, your barber probably has stricter licensing requirements than are needed to call yourself almost any kind of financial adviser or consultant.

More important than titles? Compensation

The problem with the investment advisory business is this: Most advisers make money from commissions. And anyone who makes money from commissions can never be completely trusted.

Overly harsh? Maybe. There are certainly many commission-based advisers who are both sharp as a tack and honest as the day is long. But they’re working within a bad system, one that requires them to move your money around to get paid, when often that’s not in your best interests.

Furthermore, typical advisers, at least as I write this, aren’t required to act as a fiduciary, meaning they are not required to place your financial interests ahead of their own. Instead, they adhere to a lesser standard of conduct, known as suitability. Suitability requires only that they suggest investments that are suitable for an investor with your goals, risk tolerance and financial means.

An example to illustrate the distinction: Suppose your goals and risk tolerance suggest that a stock mutual fund is right for you. There are two similar funds available. One charges a 5 percent commission, and the other 2 percent. A fiduciary would be legally required to suggest the fund with the lower cost, because that’s obviously in your best interests. The suitability standard, on the other hand, allows the adviser to suggest the fund that pays them the higher commission, because either fund is suitable.

The simple truth is this: A system built on commissions and without fiduciary standards invites abuse. That was true when I started as a stockbroker 35 years ago, and it’s true today.

Who can you trust?

To receive objective advice, you’ve got to take commissions out of the equation. There are three ways to do this. The first is to replace commissions with an annual fee based on the amount being managed. I explained the pluses and minuses of that setup some time ago in the post, “Ask Stacy: Why Is My Investment Adviser Charging a Fee on Idle Cash?”

The second way to take commissions off the table — and the better option, in my opinion — is to pay for your financial advice by the hour, the same way you do with an accountant or lawyer, by going to a fee-based financial planner.

The final option is to learn the ropes yourself and make your own decisions.

How to pick an adviser

Here’s how to go about picking the right adviser, however they get paid. These rules also apply to picking an accountant, lawyer, doctor or mechanic.

• Ask your friends or co-workers for referrals. The most useful will be those sharing a situation somewhat similar to yours.
• Check credentials. You don’t have to be a genius to pass the exams required to obtain securities licenses. Look beyond that and check out educational background and other professional credentials. The Certified Financial Planner (CFP) designation is a good one.
• Ask about experience. Credentials and education are nice, but as with most things in life, experience is often the best teacher. If two professionals charge the same price, you’d certainly rather have one with 20 years of experience versus 20 months.
• Ask them for referrals. Any professional in any field should be happy to provide them. Of course, only an idiot would provide referrals who would bad-mouth them, so don’t put too much weight on this one.
• Talk to several before you decide. This is easily the single most important thing before hiring any service professional. Only after you talk with several possible candidates for the position will the positive attributes you’re seeking surface in one of them.
• Ask how they get paid. If you read what I wrote above, this one should be obvious.

Got a question you’d like answered?

You can ask a question simply by hitting “reply” to our email newsletter. If you’re not subscribed, fix that right now by clicking here. The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.

About me

I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. If you’ve got some time to kill, you can learn more about me here.

Got more money questions? Browse lots more Ask Stacy answers here.