| | | One of the questions we're asked all the time is "Should I invest myself, or let a financial planner do it?"
It's actually a question you need to answer yourself, but not until you've spent some time educating yourself on the markets and investing in general. LearningMarkets.com is not only valuable for those who want to invest their own money, but also those who just want to understand enough to make sure they choose an investment broker/advisor who knows what he's doing and is looking out for their money.
Understanding the role of financial planners, brokers and advisors
These terms are vague and ambiguous. But each of these generally does something a little different. In the end, however, financial planners, brokers, money managers and advisors you will deal with are mostly salesmen. Their job is to bring clients, and more importantly, client's money, into their company. They are paid based on your TOTAL INVESTMENT, not your gains or losses. In the last 8 months, the market has lost over 30% of its value, but planners and advisors a still got paid their percentage of your money.
So make no mistake, whether it's in the form of commission, fees, or managment service charges, you are paying them, even when the market's down.
Financial Planners usually help customers with a wide range of money matters. When it comes to investments, in the US they are required to pass a fairly easy exam showing they understand the very basics of the markets and investing. Usually, these planners sell the packaged products of a specific company as an agent. These products and their management fees are usually very expensive compared other options, and they are usually poorly diversified and unevenly managed. Your money is almost always invested in mutual funds which, as we'll discuss, may not be the best investment for you. When it comes down to it, financial planners are basically salesmen.
Investment Advisors are similar to financial planners, but advisors are required to have licenses with FINRA and register with the Securities and Exchange Commission. This distinction allows them to charge for advice, or access to advice. Often, these advisors work as an employee for a large financial services or brokerage companies like Charles Schwab or Fidelity. Some are selling you products and getting paid a commission, while others may just be an employee who helps customers as needed. Many people refer to their investment advisor as their "broker," which is accurate, if the advisor or advisor's company actually places trades. But "broker" can also refer to the entity, not just the person.
Broker is often synonymous with Investment Advisor, as discussed above. But many people who don't use an advisor refer to the company who they have their trading account with as a "broker." But they are referring to the company, not an investment advisor. Many brokerage companies will sell you "advisory" services
after you've already opened a trading account.
Money Managers are the guys (or gals) who actually manage the money in the markets for customers. They may also be the person who sells you the product, in the case of smaller managers.
What do these guys invest me in?
The answer is usually Mutual Funds and bonds, but heavily weighted to mutual funds. We go into the pros and cons of mutual funds in another article, but suffice it to say they are pools of stock, managed by a company who employs managers and analysis to administer it. They charge you a premium for managing the fund, which in many cases is in addition to what you're charged by your financial planner or investment advisor.
But the fact that they are weighted toward stocks means they basically will go up with the overall market, and down with the overall market. It is rare to find your planner/advisor has diversified your investments into other areas, like bonds, ETFs, oil, gold, currencies, etc. These are things you should invest in if you don't want to get wiped out by major downturns in the stock market. We explain how to do that later, but it can be as easy as buying stocks when you know what you're doing.
Additionally, planners and advisors will nearly always buy and hold these funds for you, making very infrequent adjustments. They will ask you at the outset if you want to be "conservative," "aggressive" or somewhere in between, and only adjust as you decide to change that outlook.
Aggressive investments have a greater chance for gains, but also a greater risk of loss. They're usually in high-growth stocks which are naturally more volatile. Aggressive investment allocations will usually have only a small percentage of the portfolio in bonds. These allocations were really hammered from September 2008 to March 2009 because they are so closely tied to the stock market's overall performance. Higher reward is always accompanied by higher risk, and vice versa.
Conservative investments are usually more weighted in bonds, and the stocks they contain will often be big companies with long track-records of consistent growth (referred to as Blue Chip Stocks). Major market moves impact these portfolios less harshly, but they have a slower growth rate because they are less risky. And because they are only in stocks and bonds, they are still susceptible to major market corrections, albeit at lower levels.
It is rare to find a financial planner who will invest you in other instruments outside funds and bonds. That is unfortunate, because there are so many other options that offer profit, and can even out the down times so you don't lose your retirement in one bad down-turn.
Making the decision
Below are some questions to ask yourself as you decide to invest on your own or pay a financial planner. But don't make any decision until you understand each of these principles.
- Understanding Different Investments and Account Types. Learn more now...
- Becoming Economically Literate. Learn more now...
- Trend-Trading: Find and Manage Investments and Market Trends. Learn more now...
- Smart Growth Investing: Building Your Personal Portfolio and Protecting It. Learn more now...
Do I put in a little time and do it myself, or pay the fees?
You can do it on your own, and employ a strategy that's more sound, more diverse and even more protected. But it will take some time to learn, and some time to manage. We're not talking about hours a week, but it is a commitment you have to be willing to make. You can't do it half-way or you'll fail. But ask yourself: Who cares about your money more than you?
If you decide to go with a planner, make sure you know every single fee you'll be charged and demand to know specifically what you're investing in. If he can't answer the questions, dump him.
Does my planner/advisor really know what he's doing and does he have my best interest in mind?
As we mentioned previously, in many cases financial planners are nothing more than salesmen of financial products. Before you trust him with your retirement, make sure he understands the principles above. If he doesn't, look for another one or do it yourself. We get many, many emails from readers who lost their money because they blindly trusted a planner, who was often a family member or close friend.
Don't trust blindly.
What products is my planner selling and then investing me in?
Make sure a planner you consider is using a reputable company whose money managers have a proven track record. Don't trust his word. Investigate and research the company. And make sure you fully understand what he's investing you in once you sign the papers.
And if he says "Don't worry, the market always goes up," dump him!
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