This is the third installment of Stock Market for Beginners, our six-part series on investing and the stock market. You can read the previous piece, Should I Invest in the Stock Market?, here.
You pay your bills on time and you’ve eliminated your high-interest debt; you’re managing your risk by holding cash in an emergency fund and carrying a life insurance policy; and your income is growing thanks to your investment in yourself. (In reality, life is not this perfect, by the way.
You may choose to start investing while you are in the midst of getting your finances in order. What’s important is you understand the tradeoffs.)
If you’re ready to invest in the stock market, you might find yourself wondering, “Do I need a financial advisor?”
Logging into an online brokerage can feel overwhelming. I remember starting my Roth IRA 10 years ago. I logged into the Capital One investing platform and within a few clicks, I opened my account and funded it with $5,000. Then I froze.
I Googled “How to invest in the stock market” and landed on the Motley Fool, whose stock advisor subscription service provided me with personalized stock recommendations from experts that regularly beat the market. (Read our review of Motley Fool here.)
Once on the Motley Fool site — you can access a number of reputable sites such as Investopedia, I started to research individual stocks and ended up choosing seven. One was Keurig Dr Pepper and another was Johnson & Johnson. I can’t remember the rest. And if I’m honest, my specific portfolio doesn’t matter.
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What matters is that I was overwhelmed by the prospect of picking stocks, exchange-traded funds, or mutual funds. Completely new to investing, I had no idea what constituted a good investment or a bad one. I was a mess.
Learning Through Experience
A few months later, my portfolio was up 10 percent, but I wondered if I could do better.
I wound up speaking with an insurance salesperson moonlighting as a financial advisor — a big mistake.
My husband and I both ended up with whole life insurance policies. Plus, we bought fee-loaded mutual funds with high expense ratios.
In hindsight, the advisor was more interested in pushing products than in understanding our financial goals. Moreover, though there are fees to pay for a fund manager, we could’ve assessed whether our fees were higher or lower than average using information readily available on ratings sites such as Morningstar.
I thought financial advice was free. But it isn’t — nothing is free. At the time, I didn’t understand the fees being tacked onto my investments.
I purchased high-fee mutual funds — 5.75 percent of my purchase price came straight off the top as a sales charge. Additionally, the mutual funds I bought had annual expense ratios of 0.8 to 1 percent.
An expense ratio is an annual fee that covers the cost of managing and administering a mutual fund. You pay the costs of your shared investment. An expense ratio of 1 percent means that every year, 1 percent of my holdings went to managing the fund.
“No matter the size of the investment portfolio, fees will always reduce returns,” states John Stoj of Verbatim Financial.
“The key is to get value from the services that you are paying for, and to avoid fees that increase as the size of the portfolio increases,” Stoj adds.
“In other words, avoiding percentage-based assets under management fees will minimize the negative impact of fees over time,” Stoj says. “The goal should be to capture as much of the return that markets provide, while paying out as little in fees as possible.”
How Soon Is Too Soon?
Am I saying that commissions and financial advisors are bad? Not at all. Later in your financial journey, a financial advisor can become your advocate and should be someone you trust to discuss all aspects of your financial planning.
A professional can keep you from making big mistakes, and you will ideally connect with them on a regular basis. Moreover, if people provide a service, they expect to be paid, and rightly so.
However, in some cases, the fees are just too large relative to the value.
“The minimum account size varies by advisor but I would say anything less than $100,000 to $250,000 is considered small,” says Anjali Pradhan, a chartered financial analyst and founder of Dahlia Wealth.
“I would call those with large portfolios ‘high net worth’ individuals and start at around $1 million — although all of these numbers vary by advisor,” Pradhan continues.
Don’t make the mistake of hiring a financial advisor too soon, especially if you’re new to investing in stocks. Instead, work on building your investment knowledge through reading quality financial journalism. Ask yourself if the entity providing you the information has an agenda or is truly independent.
In addition to educating yourself through financial journalism, fintech companies can also be a resource for new investors. This booming industry is constantly evolving in order to make investing and navigating financial matters more tech savvy. But, of course, proceed with caution.
“There is ‘good’ fintech, and there is ‘not so good’ fintech,” says JP Geisbauer, a certified financial planner with Centerpoint Financial Management. “I’m not sure it levels the playing field, but it does give newer investors a lot of resources. Just be careful of drowning in too much information which may lead to analysis paralysis.”
Not all potential investors should wait to consult a financial professional. Navigating the complex world of finance can be challenging. It is not something everyone wants to go through on their own.
Be your own judge; if you are comfortable going forward on your own, that’s fine. If you would be more comfortable seeking professional advice, that’s fine too. There is not one solitary approach that is best for all people.
How to Educate Yourself
Luckily, there are quality financial wellness resources available that can help you educate yourself. Moreover, you can also match yourself with an advisor who has your best interest at heart.
Have you heard the term fiduciary? It basically means your financial professional is required to consider what is best for your financial welfare, charge you transparently and reasonably, and act in your best interest. Not all financial professionals are fiduciaries, so it’s good to find out if someone is before you start working with them.
Some designations that show knowledge in the subject matter include Certified Financial Planner (CFP), Retirement Income-Certified Professional (RICP), and Certified Financial Analyst (CFA), to name a few. To find a full list of professional financial accreditations, click here.
You should also ensure the person you plan to work with has a clean record.
Two organizations that oversee investment professionals provide tools to do so: the Financial Industry Regulatory Authority’s BrokerCheck and the Security and Exchange Commission’s Investment Advisor Data. Just put in the person’s name and see what relevant information the government has on them.
Last, I want to leave you with some key questions to ask someone. Remember, you are interviewing an advisor to decide if they possess the knowledge, skills, and trust you want. The CFP board offers these 10 questions to ask as a starting point.
If you have a large portfolio (more than $1 million, according to Pradhan), you may want to enlist the help of a “fee-only investment advisor.” This advisor will have experience managing investment portfolios like yours.
They will charge you an annual fee — generally not more than 1 percent of your portfolio in exchange for managing it and possibly other services.
The Bottom Line
When it comes to managing your money — you need to be educated and ideally find someone you trust who may have some smart money moves. Just remember that if it sounds too good to be true — it probably is. Use good judgment, take advantage of your resources, and educate yourself. And if the time’s right, match with an advisor that suits your wants and needs.
This is the third installment of Stock Market for Beginners, our six-part series on investing and the stock market. To read the next piece, Is Investing the Same as Gambling?, click here.
Past performance is not a predictor of future results. Individual investment results may vary. All investing involves risk of loss.