NOTE: This post is part of an ongoing education series. This information is for educational purposes only. This information does not constitute investment advice. No rational person would make investment decisions based on a blog post. Please consult with your financial advisor before taking any action.
It can be argued that the best way to invest is to do all of the work yourself and for some people this is true. If you are really interested the subject and keep up on all of your investment options you will likely do well. However, most people are busy and there are other demand on their time. Often jobs, kids or other project keep them occupied. We often use experts to help us. Instead of learning all of the details about how to write a will, you can hire an attorney. Instead or working on your own car you can hire a mechanic. I see investing the same way. So, if you are not ready to spend the time to learn what you need to know to get the most out of your investments you may be well served in getting a little help.
There are two main types of advisors and the single most important thing you should ask is, “How is my advisor paid?” There are advisors that are paid by you and there are advisors that are paid by someone else to sell you products….
A fee-only financial advisor cannot receive compensation from a brokerage firm, a mutual fund company, an insurance company, or from any other source than you. This means they represent you and your interests when giving you advice. After all, think about where someone’s paycheck comes from, and that will tell you quite a bit about where their loyalty lies.
A fee only advisor is paid by you to do what is best for you. The amount you will pay is agreed to in advance and then the focus is on getting the best results for the client.
An advisor that is paid by commission may have to make choices based on your need and how much commission is paid by a specific investment. Some complex insurance product may pay an advisor 8-10% commission and a low load managed mutual fund may only pay 3-5% commission. There is the temptation for a commission paid advisor to put your money in a product that pays the higher rate. They may be able to resist this temptation – but how will you know?
One of the single best things to use for investing is low cost index funds. These funds do NOT pay a commission and a commission base advisor would have to choose between getting paid or getting you the best product. I suggest you avoid being put into this situation.