Markets & Economy
Seeking financial advice? Here's what to consider
August 19, 2013
Amy Chain: Let's go to Larry from Washington. Alisa, I'm going to send this one your way as well. "When should you consider transitioning management of your portfolio to a professional?"
Alisa Shin: Unfortunately, much of what I've already said, there's no one right answer. It depends on who your beneficiaries are, what level of knowledge they have, where you are in your life. My general rule of thumb, though, is if you think that your family will need professional help after you've passed, they're not going to be able to handle the investments, for instance, by themselves, I always tend to think it's better to start an investment advisor relationship sooner than later, for several reasons.
Even though you can still manage it yourself—you're self-directed, you know what you're doing, you're thinking through all the market analysis that kind of thing—by starting an investment management relationship early, one, you get a chance to test drive that investment management relationship to make sure it's doing what you want it to do, that they're going to operate the way that you want, that you agree with the methodology and the service level. Two, your investment advisor, your financial advisor has a chance to get to know you, understand from your perspective what your wishes are, what your philosophy is so that when something happens to you, that financial advisor will be in a better position to help your family transition. It's already going to be an incredibly emotional time for your family. This is just something that your investment advisor relationship can help ease that burden.
Amy Chain: That speaks to the urgency, right? Start now because investment relationships aren't formed overnight. They take time to build trust and get to know each other.
Alisa Shin: Clients don't have to turn over all of their wealth to manage, just give a portion of it just to test drive it.
Amy Chain: And I think we've even talked in the past about there's nothing wrong with checking with a few different people.
Alisa Shin: That's exactly right.
Amy Chain: It's like dating. Date your wealth planner, right?
Alisa Shin: That's right.
Amy Chain: Tom wants to know how does one know whom to trust to do it right? Every firm sounds the same. Al, feel free to jump in if you have anything to add.
Alisa Shin: Yeah, we'll probably tag team on this one. That's a great question. I think it's all about doing due diligence and asking hard questions. Don't just talk about "what's your investment performance" because that's all in the past. You don't know what’s going to be in the future. Ask questions about what the costs are to hire this investment advisor? Are there any additional fees for that initial cost, like are there transactional fees behind your trades? Are there fees to close an account, to open an account? What are the other fees that's not apparent on the statement?
Talk to them about what kind of a relationship you'll have with that financial advisor. Is this financial advisor going to be able to work with your other advisors? At Vanguard, we really believe that you should choose things holistically, and the best result tends to be when all of your advisors can get along and work together so that every step makes sense and is in concert with your overall wealth plan. Talk to the advisor about whether or not they'll listen to what your thoughts are and help you understand why they might advise something different, or will they change their advice, or are they just going to implement whatever they want to implement? How discretionary really is discretionary in that type of relationship?
To be honest with you, there are recipes for gut instinct. When you meet them, meet them in person. Talk with them several times. Make sure that you can relate to them on a personal level. If you cannot tell your investment advisor, you know what, I really do have concerns about how my daughter spends money, or the husband that she's married to, he tends to spend lots of money, that person's going to have a very hard time getting you to the place that you need to be at the end of the day.
Amy Chain: So we're back to dating.
Alisa Shin: Exactly.
Amy Chain: Shop around, meet lots of folks, and then ultimately go with the one that you feel the most connected to.
Alisa Shin: Right.
Al Weikel: I would just add—I would—I think you hit all the points great. I would just bounce it up a little bit. I think you said in the question there every firm sounds the same. Well, every firm isn't the same and this maybe is a little biased, but some firms are owned by shareholders where there's dual masters to serve. Some firms are owned by families. It can be like Vanguard's, mutually owned. We're owned by the shareholders. So our job is to do what's in the client's best interest all the time, and we have a luxury of doing that because of our mutual ownership structure. So I would say not all firms are the same.
Amy Chain: Let's talk a little bit about these types of relationships that you can have with a planner, and it actually gets to a question that Juan from Milwaukee has asked, and that is, "What is the difference between a fee-only and a fee-based management arrangement? Can you help explain the term "revenue-sharing" and the distribution of fees?" So let's just level-set. Who can help you with this? How does this work? What are the different types of payment arrangements that exist out there?
Al Weikel: Yeah, so let me take that and address the question specifically because it kind of gets to your dating comments. Who's going to pick up the tab here? What are the expenses? Fee-only is just what it says. It's a fee-only service that's usually based on assets under management. Fee-based is a little trickier. Fee-based was devised by brokers and includes a fee, usually for assets under management, plus other expenses like commissions. So you have to be careful there because you look at fee-based and it could look like a lower fee than fee-only, but you have to be very careful to look at what are those other charges— commissions, like I mentioned, brokerage fees—that you may be charged, as well. So fee-only is what it is. Fee-based, you better look deep.
Revenue-sharing is—that's when a company is actually compensated for using another company's product, and that is a specific financial incentive for that company to use those products, and that's an important point. It may not be a bad thing, but it is an incentive for that company to use another company's products. That generally is not an extra fee that's charged to the client.
Then you mentioned distribution fees. That's another fee where generally, distribution fees are referred to as 12b-1 fees, and those are that are used for the selling and distribution of investments, so like brokerage commissions or sales commissions, those are also—sort of fall under the category of advertising fees, fees for printing and mailing prospectuses, fees for printing and mailing sales literature, things like that. The 12b-1 fee is usually an additional part of the expense ratio.
Amy Chain: So that's embedded in the cost of the investment versus something that the advisor is charging.
Al Weikel: That's exactly right, and the expense ratio comes off of assets and earnings. So again, to really understand the components of the expense ratio, and costs matter that much, so to make sure you understand these different fees. So it's a bit confusing; fee-only, fee-based, revenue-sharing, distribution fees. Know your costs because costs matter.
Amy Chain: So let's break that down a little bit again. So we've got the—if you're hiring an advisor, you have to look at how they're being compensated, both from you and from others. Are they receiving compensation from fund distributors or security distributors to sell their products? You also have to look at the cost of the investments that you're making with them. So it's the expense ratios and any other fees associated with commissions or buying and selling from that particular advisor. Is that right?
Al Weikel: That's correct, absolutely.
Amy Chain: There're multiple levels of fees that need to be considered.
Al Weikel: Yep.
Amy Chain: Let's keep with that fee theme here. Ralph from Tucson, Arizona, where I’m sure it's very warm today—Ralph, I hope you're in a nice air-conditioned room. "Seems to me," Ralph says, "that the fees for Vanguard or anyone else to manage a well-balanced portfolio are relatively high if the majority of the funds are in low-cost stock index funds and low-return bond funds. What's the benefit to justify the cost?"
Al Weikel: That's a great question, Ralph.
Amy Chain: Let's break that down. There's a few things to talk about in there, I think.
Al Weikel: Yeah, there is, there is, because we would say that simple can be the absolute right things for clients. It does not have to be complicated. Like I mentioned earlier, keep it low-cost, keep it diversified, keep it tax-efficient with even a few funds. That can make a lot of sense. To Ralph's point, what am I paying for then? Well, it's a great question. In fact, Monday on a very well-known investment website, there was actually an article out there where the writer did a piece based on an internal Vanguard white paper from our Investment Strategy Group called, "Advisor's alpha," and it talks about really just what Ralph is getting at here, and the point is that the advisor really does have a lot of value, even if that portfolio seems fairly simple.
So for instance, there's incredible value to the relationship, and if you really find a competent, trusted advisor, there's a lot of value to that. The advisor can really serve as a behavioral coach. I mean, that’s one of the major things that an advisor can do for you. What I mean by behavioral coach is, even for a savvy investor, if the market's extremely volatile, what we see a lot of times when we look at cash flows is when the market's down, people tend to sell. When the market then starts to do well again, they buy.
Well, what did they do? They just did the opposite of what you really should do. They just sold low and bought high. Well, an advisor can help you with some discipline there. It can help you not react to that volatility in the market.
Same thing with rebalancing. We talked about asset allocation being very, very important. If you're supposed to be 50% stocks and 50% bonds, and equities have done well, and you’re now 60% stocks and 40% bonds, you may be saying to yourself, "I kind of like that. I had all that return on equities." Well, guess what? The right thing is to get back to the 50% stocks, 50% bonds, which was your allocation. That's based on your risk propensity. That's the volatility that you're really going to be comfortable with. So you could be overexposed to risk, so again, that advisor can help you be disciplined in those situations.
Lastly, a lot of times, advisors will do lots of other things like income tax planning, prospective income tax planning, estate planning, different things like that that can really add tremendous value. So I would say if you get a trusted, competent advisor that is money well-spent.
All investing is subject to risk, including the possible loss of the money you invest.
For more information about Vanguard funds, visit Funds, Stocks & ETFs or call 877-662-7447 to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
Vanguard Asset Management Services are provided by Vanguard National Trust Company, which is a federally chartered, limited-purpose trust company operated under the supervision of the Office of the Comptroller of the Currency.
This webcast is for educational purposes only. We suggest you consult a financial or tax advisor about your individual situation.
© 2013 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.
How to choose an advisor who's right for you
There’s a lot to think about when you’re selecting a financial advisor. Alisa Shin of Vanguard Asset Management Services™ and Al Weikel of Vanguard Flagship Select Services™ suggest questions to ask and what you should expect from an advisor.
Other excerpts from this webcast:
- All investing is subject to risk, including the possible loss of the money you invest.
- For more information about Vanguard funds, visit Funds, Stocks & ETFs or call 877-662-7447 to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
- Vanguard Asset Management Services are provided by Vanguard National Trust Company, which is a federally chartered, limited-purpose trust company operated under the supervision of the Office of the Comptroller of the Currency.
- This webcast is for educational purposes only. We suggest you consult a financial or tax advisor about your individual situation.
© 2013 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.