Posted By: CFP&WM On: Mar 27th, 2013 In: Financial planning Investing Money Matters

Have What It Takes To Invest On Your Own? Part 2

Figuring out how much help you need with your investments can be difficult but here’s some guidance to get you started.

In the first article we listed the important tasks for successful investing. A check list was provided to help aide you in determining which task you were able to do yourself and identify which areas you might need some help in order to improve your investing outcome.

The 5 different investing choices or methodologies were presented and include:

  1. Doing it all on your own.
  2. Advisor provides advice to you on an hourly basis or as part of a financial plan.
  3. Advisor and you “co-manage” your investments on an ongoing basis.
  4. You turn the management of your investments over to a “money manager.”
  5. You get “advice” from a salesperson that sells you an investment or other product.

Now, click on the link below to see a chart of which tasks are to be handled by you or others under the 5 investment choices. Keep in mind that an RIA is a Registered Investment Advisor and BD stands for a Broker Dealer representative.

When most people compare their checklist from Part 1 of this article to the chart above, Option 2 or 3 are more often than not the best fit for most people.

  • Invest on your own (Option 1) is not usually a good option since few people have the time, tools, knowledge and/or motivation to do it all by themselves.

  • As needed assistance (Option 2)
    is a good choice for those individuals who have the ability to implement the recommended suggestions from the professionals but may not have enough assets to consider a higher level of service as one might obtain under Options 3 or 4. These investors typically need only an annual tune up.

  • Collaborative or Co-Management (Option 3)
    is well suited to those individuals who want professional advice and the benefits derived from having their portfolio monitored on a periodic basis. They are comfortable knowing that the professional will proactively reach out to them if an issue arises. This option is better suited to those investors with a higher asset base and who wish to be part of the “process” (being educated and involved in the decisions).

  • Investment Management (Option 4)
    is best suited to those investors who prefer to sit back and let others do it all and they are more than happy being an observer to the process.
    At first glance, there is little difference between Option 3 and Option 4 but psychologically there is a big difference. Many people believe that no one could possibly care as much about their money as they themselves do, so in that instance they feel better being part of the process and choose Option 3.

  • Buy investments from Broker Dealer (Option 5
    ) is the antiquated and duplicitous approach made (in)famous by the big names in the financial services industry whereby the industry representative “pushes” a product and makes suggestions that are often better suited to the sales person and their company rather then you, as the investor. This clearly is not a good option for any investor.

Cost of each option

  • Option 1 – (Do it Yourself) Many people would assume that there is no cost to doing it yourself. On the contrary, without even taking into consideration the many man-hours it takes to accomplish all of the required tasks, the costs for the Do-It-Yourself option continue to mount. There is a great deal of evidence, which shows that most investors greatly under perform the markets. Let’s say that an investor had $200,000 of investments and underperformed the market by 2%. In essence, they “lost” or failed to earn $4,000 that year as a result. If they underperformed by just 2% every year, over a lifetime, their assets would be 56% less than what they could have been, i.e. $1,000,000 versus $440,000. That is very costly, indeed.
  • Option 2 – (Hourly Advice) You pay by the hour ($150 to $300 per hour based on location and experience) or as a part of an overall financial plan that covers many other financial topics ($1,500 to $3,000 per plan, again depending on location and experience).
  • Option 3 – (Co-management) The cost of this option could be based on a retainer, which is a set dollar amount each year. Alternatively, the cost could be based on a percentage of the amount of assets that are being co-managed; typically, that might be between0.8% and 1.5% of the assets under management. In some cases, this could be done on an hourly basis but that seems to be rare.
  • Option 4 – (Investment Management) The cost under this option is usually based on a percentage of the assets being managed.  It can also be based on retainer as a set amount each year.  In reviewing the various ADV forms, it would appear that the big brokerage houses such as Merrill Lynch, Morgan Stanley and Edward Jones start their fees at 2%, though 1% is much more common in the industry. The fee usually decreases as the amount of assets go up.
  • Option 5 – (Commissions) The percentage paid in commissions varies by the type of investment being sold. Bond funds can generate a commission of between 2.5% and 3.5 % of the sale price while mutual funds that invest in stocks can generate a commission of as much as 5.5%. Some annuity products have the highest commissions, often 7.5% or more. Given those commission rates it’s not hard to understand the high-pressured sales pitch, though that doesn’t excuse them.

So the question is which option is best for you?

Hopefully, you are now better equipped to make a sound decision as to the investment approach that will help you reach your goals.

To talk to a non-commission-based advisor near you or to discuss the best investing approach for you, contact NAPFA or Garrett Planning Network.


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