Is it a good idea to have a brokerage manage my investments, and if so, how do I find a firm to do it for me?
I recently came into an unexpected inheritance. It is not a fortune, but it is substantial. I am a busy working adult with a full-time job and a part-time job. I do have investments, but not the experience, time, or knowledge to feel like I am very good at it. I am thinking about investing the inheritance into a brokerage managed account, as I have read online that the management fees are small enough to be basically insignificant. Given my busy schedule, this seems ideal. Is it a good idea to have a brokerage manage my investments, and if so, how do I find a firm to do it for me?
You certainly should consider having professional assistance, but that means an experienced Certified Financial Planner who has been in the business long enough to manage both the ups and downs. Simply going to a brokerage house for assistance is exposing yourself to folks who are primarily salesmen, not money managers. Plus, the likelihood of high fees.
To find a qualified adviser near you, go to Find An Adviser at Napfa.com. That’s the website of the National Association of Personal Financial Advisors. Call and meet with several. Then select the person with whom you’ll be most comfortable.
What a great question. My answer based on 30+ years in the investment business is that you appear to be an ideal individual looking for an advisor. First, you have a substantial amount of money. Second, you realize that you don’t have the experience and training to manage your inheritance by yourself.
Having worked for large brokerage firms and having founded my own Registered Investment Firm (RIA), here is my recommendation: avoid the large investment firms.
The focus of the big Wall Street firm is sales, and the brokers that work there are the sales force. That doesn’t mean that they’re bad, it just means that their focus is on generating revenue for the company. The company then gives some fraction of the fees and commissions to the brokers; that’s how they get paid.
I left the big Wall Street firms to create my own RIA. I work directly for my clients without the constraints or conflicts of the big firms. I am a fiduciary which means I am legally obligated to put my clients’ interests ahead of my own. I tailor my clients’ portfolios to their needs. My fees are up-front and full transparent.
Go out and interview RIAs in your area. Ask them what they do, what they charge, how they manage investments, how long they have been in business, and get a copy of their ADV (they’ll know exactly what this is). Tell them how much money you have. They should ask you about yourself, about your objectives, your investment experience and your risk tolerance. Because of this process you will find someone you like and trust to manage your inheritance.
Fees are not really insignificant - they can add up. What is important to measure is what will you get for the fees you pay in terms of service, and also to consider investment philosophy.
As an example, many brokerage firms will take your money, charge you a substantial fee to buy and sell investments, and that is about all.
Other firms - in my experience typically independent financial planners - will provide a similar service at a similar fee - but will also include detailed financial planning and non investment financial advice.
Furhtermore, some brokers will charge you a fee for investment management - and then build into your portfolio products that pay a commission as well. Just my opinion, some will object - I think if you pay someone to manage your investments they should a) put your interests first above their own - i.e. be a fiduciary and b) should be seeking out the very best (often but not always lowest cost) investments on your behalf, rather than choosing investments that will enhance their own income.
I would agree that the fee is worthwhile to the extent you don't have time, interest, or patience to really learn about how to be a good investor. (hint: it has more to do with what you DON"T do (panic when the market falls, trade frequently, make emotional decisions, etc.)
Consider looking beyond the brokerage channel and consider finding a fee only financial planner and compare levels of service, fees, and approaches. You can find fee only financial planner near you on www.napfa.org.
It sounds like you have a lot going on even with this new inheritance, so you should seek a full service firm. This is a firm that will:
- Start with a big conversation about your financial life, where it is, and where you want it to go
- Provide advice and accountabilty on things like your household cash flow, savings rates, work benefits, and any other area of finance that you have questions
- Provide guidance at each financial transition of your life (new jobs, lost jobs, college, marriage, retirement, medicare, social security, estate planning)
- Invest your capital to give you the best chance of meeting those goals
Stay away from "investment only" shops that claim to have the latest and greatest market-beating investments. The best firms in the industry use a disciplined, standardized investment approach to seek superior risk adjusted returns over the long term. For that service, along with all the financial planning I described above, will charge an annual fee of about 1% of your account size.
Plenty of firms out there will be happy to help you, and they don't necessairly need to be in your geographical area. If you find someone online, give them a call because many good advisors work remotely with clients outside of an occasional face to face meeting.
It sounds like you could benefit from professional help. My recommendation would be to visit the National Association of Personal Financial Advisors (“NAPFA”) website and search for a member in your area. If there are several, you can screen them for credentials, expertise, and fees, and visit them via phone or in person to choose.
Obviously, there are hundreds of brokers and brokerage firms to choose from, but NAPFA professionals offer two important benefits. First, they are “fee-only” meaning they don’t earn commissions on products they sell. And, secondly, they are fiduciaries. They have a legal obligation to put their client first when making decisions.
Commissions are a traditional approach to selling investments, but they narrow the field of options (some investments pay commissions to salespeople, others don’t). The broker working in this system is only paid from the sub-category offering commissions. And the commission itself is an extra layer of fees for the buyer.
Some people dislike the NAPFA business model because it requires an ongoing fee, usually a percentage of the portfolio amount. My experience – and I’ve been managing investments for several decades – is that this ongoing fee is often lower than the combination of fees paid elsewhere. More importantly, that ongoing fee is for ongoing service; these are mostly discretionary portfolios professionally devised, implemented, monitored, and adjusted for your benefit.
I’ve been a NAPFA member for years and I serve on one of the NAPFA Regional Boards. Not everyone needs this level of service, but it sounds like your schedule and circumstance favor it. I’d contact a NAPFA advisor in your area as a starting place.