But how do you judge if an advisor is any good? After all, you're hiring someone because they know more than you.
Many people end up deciding based on reputation, paying 3 percent of their net worth to Wall Street banks instead of keeping it for their families. They don't know any better. Online advisors like FutureAdvisor can manage your investments for one-sixth that price by using software to reduce overhead.
Others rely on word-of-mouth referrals to find a firm they trust. That sounds like a great idea, until you remember that everyone who invested with Bernard Madoff came to him through a warm introduction.
One objective way to choose is to try before you buy. FutureAdvisor offers a free service that shows you exactly how we'd rebalance your portfolio to increase your chances of long-term success. Over 200,000 households rely on us to help them grow more than $30 billion.
For people who are just starting on their search for an advisor, the first step is to determine what's available, what you need, and what you can afford.
Many are surprised to find they can't hire a financial advisor at any price. That's because most financial advisors are paid a flat percentage of the money they manage, the thinking being that if your funds grow, they get paid more. So they require clients to have at least $500,000 to invest, thus guaranteeing a minimum revenue.
But less than 20 percent of US households qualify, which leaves the vast majority of us out in the cold. Those who can't afford flat-fee financial advisors often turn to stock brokers, who earn a commission on every trade clients make.
You can see how commissions might give brokers the wrong incentives, and how clients might be encouraged to buy and sell frequently. Every time you complete a transaction, a broker gets paid a little more, even if that move wasn't the best for your portfolio.
Another type of pseudo-advisor is the insurance salesman of so-called income annuities. If you're under 50 and someone tries to sell you one of these, you should probably run away. These products tend to take more money from you than they give back, and they tie up assets that would be better invested elsewhere.
Wall Street's whole promise, and the premise of investment advice, is to take a little bit of money from you and return a lot. Too often, the opposite happens. Returns are unpredictable, but fees are dead certain. Beware the advisors who conjure visions of wealth if you just pay higher fees.
Now that we've dealt with the basics , let's talk about your personality and how you can find the best match.
Active vs. Passive
There are two fundamental schools of investing: active and passive.
Active investors believe people can see the future. They buy the securities they think will go up, and sell the ones they expect to go down. They think they'll beat the market, and a very small percentage of them are right.
The best solution for an active investor is an inexpensive online broker, so that they can at least save on fees while they're throwing their money away. These investors are usually rewarded in adrenaline rather than cash.
Still others believe in active investing, as long as someone else does it. They believe in gurus. Wall Street is full of bankers and traders who'll help you get rich...for a hefty fee. One question to ask yourself is: if they really have the secret to getting rich, why do they need your money to do it? And then, where are all their customers' yachts?
A guru's most common sales tactic is to point at recent performance. Unfortunately, past performance doesn't predict future returns well, as many investors have learned to their sorrow. Three-quarters of all large-cap, actively managed funds failed to beat their benchmarks in 2013. So if you're choosing a guru, the odds are 3 to 1 against you.
Predicting the future is difficult, and it's a game that FutureAdvisor doesn't play.
We belong to the long-term, passive-investment school, which allocates assets according to Nobel-Prize-winning theories. The investor's best strategy is to buy the right mix of stocks and bonds, pay as little as possible to hold them, and keep those investments as long as possible.
Long Term Management
Investors who want long-term portfolio management have many options, which we've written about at length.
We believe that ETFs are usually superior to mutual funds, for many reasons. A major reason is that most mutual funds rely on active stock picking (as discussed above), while ETF fees are much lower.
Of the three options, only target-date funds, or TDFs, automatically rebalance your assets over time. They do so by holding assets like stocks and bonds in one fund, and slowly shifting your exposure away from the volatile stock market towards more stable, albeit lower-growth, bonds as you approach retirement. The target date they refer to is the day you plan to retire.
The shortcoming of TDFs is that all your assets have to be in one account to be managed well. Which means if you have investments elsewhere, you have to sell them, pay taxes on the gains, and then reinvest.
This is where advisors come back into the picture. An automated investment manager like FutureAdvisor can show you how to create the same asset balance TDFs give across several accounts, without having to cash out of your brokerage account and IRAs. Further, it helps to reduce your tax obligations by placing your assets in the right accounts.
Most important, our investment management service assumes fiduciary duty for your assets from the moment you choose us, which means that we have an obligation to avoid conflicts of interest -- the same as your lawyer or accountant -- and to minimize your fees as we set up your account.
This is the kind of holistic portfolio management that wealthy investors have received from financial advisors for decades. Interested? To get started, sign up for your free analysis.