Once an individual becomes debt free (yes, it is possible), he/she often begins to dream of investing for their future. Often uncertain of how to accomplish this, he/she begins to wonder, “Should I hire a financial planner/advisor for my investments? What is the cost? Will it benefit or hurt my financial future?” Many investors choose to have a planner merely because they have no belief in their ability to grow their earnings. They assume that their “professional” can make wiser decisions which will ultimately lead to greater gains than if they would have made an effort on their own. In some cases, this is true; Financial Planners are highly educated and understand the ins and outs of complex trading, but remember September 11, 2001 or late 2007? The stock market crashed and most people lost money, including those wise financial planners.
If you begin to start searching for the average rates for financial planners, your head may start spinning from all of the information. The rates may depend of the size of the brokerage, the amount invested, the amount of transactions placed, the type of services needed, and the list goes on. Rather than dig into the minute details for every option, let’s take a look at the two most common ways that a financial advisor will charge for their services.
Your financial planner will charge you either with (1) commission or with (2) specified fees. If your planner is charging commissions, then he/she is more commonly known as a broker. The commissions charged by your broker are often a percentage of your investment, sometimes as high as 5%. There are also administrative fees (for handling your paperwork) and additional expenses (between .25% and 2%) for the transaction costs. Adding up these expenses, one can easily incur a 7% loss of investment in a stale market.
If your planner is charging you by way of fees, they typically will charge by one of the following methods:
Assets under management fees — A small percentage (often less than 1%) is charged yearly, but you must have a large amount invested (upwards of $100,000) to qualify.
Hourly fees — Planners charge you a fixed rate per hour (can easily be $250 per hour)
Service fees — Planners have a set rate for each service they perform. This is often better because you can be certain of the cost before the service occurs.
As you can tell, the fees can add up as well, especially if you are actively moving your money around.
If you are anything like me, you may think that you can invest your money without the help of “professionals” and it will save on costs as well. Because my background is in finance, I am obviously bias in this decision, but it’s not because I feel my knowledge supersedes the average investor; but rather, it is because I am aware of the vast amount of information that is available to all of us. MorningStar.com is a great example of this. You can check stock ratings, mutual funds, index funds, ETFs, hedge funds, and much more – it’s just one click away from the home page. Etrade is another great source of investing information.
When you are ready to make the decision between hiring a financial advisor and investing your money on your own, just ask yourself this question. “Do I truly believe that this advisor can net a larger profit than me after all the fees are removed from my account?” If you answer is yes, then by all means allow them to take over your funds. But, I find it hard to believe that anyone could wholeheartedly answer yes to this question. I mean, if I hired an advisor that charged me an overall 5% on my investments and they made me a gross profit of 7%, this means that I really only netted a gain of 2%. I could have stuck my money into a high-interest savings account and made that gain by myself!
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.