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Once you’ve opened your investing account, you’re ready to get started on building your portfolio. But which investments do you make? With over 3,000 stocks in the United States alone, it will be tempting to look for some extra guidance.
But be careful where you turn. Not all investment advice is created equal.
There are two types of professional you’re likely to get financial advice from.
The first is your stock broker.
Nowadays, you don’t need to call a stock broker to make a trade, you can simply do it online. But you can certainly still call.
While brokers will execute the trades you ask for, they also make a commission on the type of investments you buy. That means they make more money by getting you to buy a financial product with a higher commission.
Brokers are only obligated to follow the suitability standard when it comes to recommending investments to clients. As long as their recommendations are “suitable” for a clients objectives, risk tolerance, and budget, they are free to push the most expensive products or those that pay the highest commissions.
Brokers have earned a reputation for pushing expensive, unnecessary, and complicated products on their clients. Annuities might be the best example of a high commission product that simply doesn’t make sense for most investors.
Annuities pay investors a regular income after they’ve contributed enough money to trigger the payouts. They’re often sold as a retirement product since they can supplement income for retirees living on a pension or Social Security.
And they are almost always a bad deal for you.
In short, annuities are worthwhile for people with high incomes who’ve maxed out every other type of retirement account, like IRAs and 401(k)s. But brokers are known for pushing these products on average investors due to their high commissions.
This is a bad deal for you.
If you’re going to use a broker, make sure they’re simply executing the trades you’re asking for. And if they’re recommending a complicated financial product to you then do your due diligence.
A second – and better – option for help is a fiduciary financial advisor.
A fiduciary is held to a higher standard than mere suitability. They have to act in your best interest. That means if they are recommending an investment to you, it can’t also be because it will benefit them.
While fiduciaries are better for financial advice than a broker, that advice can cost you.
Many financial advisors will handle all of your investing decisions for you while also helping you plan for retirement or life goals. This can be an excellent service, but they typically charge a percentage fee of you assets under management.
And a typical 1% fee on assets under management could end up costing you hundreds of thousands of dollars over the long term.
Nerdwallet did the math. Let’s say you’re a 25 year old who wants to start saving for a retirement at 65. If you funded your account with $25,000 and contributed $10,000 per year, a 1% management fee could cost you nearly $600,000 by the time you retire.
But it would only cost you $250 in your first year.
That’s why many investors happily hand over the keys to their retirement planning to a financial advisor. Paying a few hundred dollars a year to have a professional manage your money seems like a good deal until you realize what it adds up to over the course or your working life. You could have bought another house with that money!
If you want to use a financial advisor, we recommend finding a fiduciary who charges a fixed fee per meeting. These fee-only advisors will give you the same professional advice and help you plan for retirement or other major expense, but they won’t eat into your returns by taking a cut of your money.
Of course, you’ll still need to manage your portfolio yourself, but that’s even better for you. Knowing exactly where your money is invested, why it’s invested there, and what kind of returns you’re making is essential for taking control of your financial future.
And managing your own portfolio is simple enough that it only takes a few hours a year to keep it balanced.
By taking this course, you’re already well on your way down the road to success.