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Financial Advisors

How to Find a Financial Advisor if You’re Not Rich

by sshrx_ns3li1 February 21, 2020

written by sshrx_ns3li1

If you think about it, the people who need a financial advisor are the ones who can't afford one. If you're impoverished or firmly in the middle class and can't seem to make it to the next level, you're the one who could really use financial advice. If you're wealthy, you know what you're doing.Yet many financial advisors simply aren't interested in working with the middle class. Many firms in recent years have stopped paying commissions to brokers for accounts that are considered small, including accounts ranging from $100,000 to $500,000 in assets. Firms that do take less than those minimums sometimes charge as much as 2 percent in annual fees, though 1 percent is more typical.So what should a middle-class investor do to find a good financial advisor? Experts recommend following these tactics.Know Where to LookAt the beginning of the process, you should think about what type of financial advisor you want to meet with: fee-based or commission-based. Think about what you're looking for. Are you seeking help with investments and retirement planning, or simply someone to go to when you have questions? Some advisors include financial planning in their fees for managing your investments, while others charge a separate fee or hourly rate for advice.As for where to find a financial advisor, there are several places, from the obvious to the unexpected: Ask friends, family or colleagues for recommendations. Obviously, you'll be more likely to find somebody who will work with you if your friends, family members or colleagues are in a similar tax bracket as you are. The Garrett Planning Network. GarrettPlanningNetwork.com offers a map of the United States where users can click on a state and find a listing of financial advisors who cater to the middle class. The National Association of Personal Financial Advisors. The association's website, NAPFA.org, allows you to find a financial advisor near you. It isn't for financial advisors who generally cater to the middle class, however. Still, you may want to take a look and see who shows up near your home. Robo advisors. You may want to consider an automated portfolio management service as a cost-effective option. For example, Schwab Intelligent Portfolios does not require advisory fees, account service fees or commissions, though you will need $5,000 to get started with them. Meanwhile, Wealthfront, another popular robo advisor, has a $500 minimum account requirement, and only charges an annual advisory fee of 0.25 percent on all assets under management deducted monthly. The Accredited Financial Counselor website. "I would strongly encourage true middle-income people to look (at Afcpe.org) for an accredited financial counselor," says Justin Chidester, who is both an accredited financial counselor and a certified financial planner – as well as the owner of Wealth Mode Financial Planning in Logan, Utah. Search engines. This one may seem like a no-brainer, but the power of search engines can't be overlooked. Chances are a search engine is how you found your way here. So if none of the above prove fruitful, consider a quick Google search for "financial advisor near me" or "financial advisor for the middle class." You've probably heard of certified financial planners, but accredited financial counselors have been around for a while too, according to Chidester."They often have a focus on helping low- and middle-income people, at affordable prices, with topics relevant to everyone – saving, budgeting, paying debt, improving credit, preparing to buy a home and working through poor habits with money," Chidester says.He adds that they can't legally provide investment or insurance advice, but they can provide great education about any financial topic and point you in the right direction for those things.Know What Questions to AskAre you looking for help with investments and retirement planning, or simply for someone to go to when you have questions? Knowing what you're looking for in a financial advisor is the first step to finding the right advisor for you. Knowing how to match an advisor to your needs is the second step. Ask any potential financial advisors these questions: What services do you provide? What type of clients do you typically work with? How will we communicate with each other? How often will I hear from you? Are you a fiduciary? How are you compensated? And how much will I be charged for your services? Some advisors include financial planning in their fees for managing your investments, while others charge a separate fee for advice. As for how much you'll pay, it will vary depending on where you live and the scope of the work you're asking for. Some advisors may charge a couple thousand dollars for a comprehensive plan; others may charge around $200 to $400 an hour to dispense financial advice.Stephanie Genkin, a certified financial planner in Brooklyn, New York, charges hourly – as opposed to what's known as "assets under management." Most fee-only advisors charge according to assets and therefore have minimum thresholds an individual needs to have in their bank account before they'll even consider the person as a client. How much is the minimum? It varies, of course, but often you'll need at least $50,000 before many advisors will consider working with you."That means most middle-class people are automatically excluded from service as they don't have enough in investments to manage," Genkin says. Genkin, who charges $200 an hour for her services, is also a fiduciary. That's important to know because there are two standards that financial advisors adhere to. If you're working with a fiduciary financial advisor, they are legally bound to put your needs before their own. A financial professional who has a suitability requirement is legally bound to provide products that are suitable for your needs, but which may not be the very best for you. That doesn't mean somebody who upholds the suitability standard isn't going to look out for you – but it does mean that the rules for those advisors are less stringent.Registered investment advisors, investment advisor representatives and certified financial planners all carry fiduciary-level responsibility. You can easily spot these titles on business cards, websites and email signatures, if you look after the person's name. Chartered retirement planning counselor and accredited investment fiduciary are other designations that indicate a fiduciary responsibility. Keep in mind, your financial advisor will likely carry a Series 65 license or a Series 7.As for what you might discuss with a financial advisor, it can run the gamut. In Genkin's case, she says, "I work with students to help them create realistic debt repayment plans, self-employed individuals who need help figuring out what they can do to save for retirement and new families who have limited resources and would like to save for a down payment on a home and start a college savings plan for their baby at the same time."She also points out that you may not need many hours, at first, with a financial advisor. If you're just starting this journey, you probably have fewer assets, and you just need that initial guidance. By the time you need more help to manage your assets, well, you'll presumably have more money, and paying for more financial advice won't be as challenging.Stick Up for YourselfTo avoid getting scammed, make sure to get references and check out everything you can find on the financial advisor online first. And keep in mind, everyone pays something when they hire a financial advisor – and not everyone is out to get you.But after you find a financial advisor, you do want to make sure you're in sync. You'll want to get a sense of whether your advisor has a financial philosophy that lines up with yours.And the most important question of all? "Ask how can they help you reach your goals," says Brett Anderson, a certified financial planner and president of St. Croix Advisors, an investment advisory firm in Hudson, Wisconsin.And if you're anxious that you don't make enough money for a financial advisor to work with you, just tell the advisor upfront what you earn, Anderson says."Established advisors will want to have a dialogue even before they schedule an initial meeting with you," he says. "Be honest. Just lay it all out. You'll save everyone time."And the more time you save in looking for a financial advisor, the faster you can get started making your money work for you.

February 21, 2020 0 comment

Financial Advisors

Understand Your Investing Risk Tolerance

by sshrx_ns3li1 February 21, 2020

written by sshrx_ns3li1

Understanding your true investing risk tolerance goes much further than checking a few boxes on a risk tolerance quiz.Investment risk encompasses several broad concepts, with multiple iterations of each. Longevity risk encapsulates the possibility that you’ll outlive your money. Risk tolerance taps how much of an investment loss you can psychologically withstand. Jason Escamilla, CEO at Impact Labs in San Francisco, describes a two-step plan for tackling client risk: First, protect the client’s wealth and second, ensure they can meet their goals. When approaching risk, Escamilla incorporates both emotion and analytical risk analysis.Here are a few steps for protecting your mental health and financial wealth by understanding your risk tolerance:Define what you consider to be riskier assets.Access your risk tolerance.Categorize your risk level.Manage your risk. Defining RiskWhen discussing risk, it’s common for the investment community to focus on standard deviation or volatility of investment returns. The standard deviation of investment returns measures how far from the average annual investment returns plot on a graph. When applied to annual investment returns, past returns are used to calculate the current standard deviation.A standard deviation close to zero means that the returns are consistent and approximate the average. A certificate of deposit has a standard deviation close to zero. Invest $1,000 in a certificate of deposit, and as long as the investment is owned until maturity, the consumer receives the stated interest rate.For a riskier asset, the 10-year average standard deviation of the SPDR S&P 500 ETF (ticker: SPY) is 12.69. A higher standard deviation means that there’s a likelihood that returns will deviate from the mean, both up and down.Riskier assets, like stocks, have more dispersed returns and typically a higher standard deviation. For example, since 2008, the S&P 500’s greatest loss was in 2008, with a decline of 36.55%. While in 2013, the S&P 500 gained a 10-year record of 32.15%.An investor seeking higher returns must also accept the possibility of greater losses.Longevity risk is akin to risk capacity and relates to the possibility of an investor outliving her wealth. Wealthier individuals have a high-risk capacity or low-longevity risk. Those with more limited means have a greater chance of outliving their assets.A wealthy investor might have a low-longevity risk and still be uncomfortable with investment losses. This investor would be conservative, despite the portfolio’s ability to withstand losses.Assessing Risk“Risk tolerance is a concept that can be difficult to gauge with clients. A client's risk tolerance can change with the direction of the market. When the market is doing well, clients want to be very aggressive and when the market is experiencing some downward volatility, clients can be fearful and want to go to cash,” says Mario Hernandez, a certified financial planner at Gemmer Asset Management in the San Francisco area. Gemmer has a unique strategy to assess client risk. He educates clients with data, describing past stock market declines and then asks them how they'll sleep under those circumstances. That informs the level of risky equities to include within a client portfolio.Brandon Renfro, an assistant professor of finance at East Texas Baptist University, uses a similar approach. For older investors, he asks clients what they did during the onset of the Great Recession and then queries them about how they would react to a future stock market drop.Typical risk tolerance questionnaires ask investors about how they would respond to distinct levels of investment declines. Typical response choices include sell, hold, or buy more of the risky asset after a decline. Investors' responses attempt to describe individuals' risk aversions.But these risk quizzes are historically inaccurate and the more “in vivo” discussions of Renfro and Gemmer are likely to yield more accurate risk-tolerance levels.Categorizing Risk LevelsThe simplest way to categorize risk levels is by time. Short-term investors who will need their funds within one to four years should invest conservatively, with minimal exposure to equities and the greatest allocations to cash and short-term bonds. That’s due to the unpredictability of the stock market in the short term. Investors don’t want the $50,000 downpayment for their new home to be worth $40,000 in two years when they are ready to buy.In contrast, one might assume that long-term investors are aggressive, but that assumption is too simplistic.In the long term, over decades, stock prices trended upwards. But the positive stock market average returns over the long term mask short-term volatility. Realistically, the future is uncertain and there are no guarantees that the upward trend of stock prices will continue. That’s why assessing risk tolerance is tricky.For the mid- to the long-term investor, risk levels will vary from conservative to aggressive. The risk level is represented by the amount of loss an investor is willing to withstand. Even an investor with great wealth may not be willing to tolerate the loss potential of a stock-heavy investment portfolio.A conservative investment portfolio typically holds between 70% and 90% cash and fixed assets, with the remainder in stocks. While an aggressive investment portfolio ranges between 80% and 90% stock investments, with the remainder in bonds.The most common risk tolerance levels vary between conservative and aggressive, with conservative portfolios owning fewer stock assets and more aggressive ones owning greater amounts of riskier holdings.Managing Risk“To manage risk, we believe that it is essential to diversify your assets – whether your risk tolerance is conservative, moderate or aggressive. We recommend reviewing your investment goals, risk tolerance and time horizon with your financial professional on a regular basis to make sure they are aligned with your asset allocation,” says Chris Haverland, an asset allocation strategist at Wells Fargo in Greensboro/Winston-Salem, North Carolina. Diversification reduces portfolio volatility so that if one asset class loses value, others will offset the loss with investment gains. That’s why it’s important to own stocks, bonds and possibly other financial assets like real estate.Some investors prefer to manage risk with a passive portfolio. In this scenario, the investor maintains a constant mix of assets such as 60% stocks and 40% bonds. While others prefer to manage risk actively by adjusting investments according to market and economic conditions.Rick Lear, chief investment officer at Lear Investment Management in Dallas takes an active approach to risk management. Lear conducts in-depth research to determine which asset classes might go up. Then the firm heavily weights the asset classes projected to rise in the future, considering both the research and the economic cycle.Victor Haghani, chief investment officer at Elm Partners in Philadelphia, uses an active value and momentum-based asset allocation strategy. The unique Elm Partners algorithms manage risk by integrating value measures into their asset selection and overlaying those asset class picks with a momentum screen. All clients of Elm’s managed portfolio sign up for an asset allocation that adjusts according to an active assessment of fundamental and momentum factors.Understanding risk tolerance is an active process that incorporates personal, economic and market factors. It’s important to understand one’s time horizon, risk tolerance and risk capacity before constructing an investment portfolio. A comprehensive understanding of investment risk will minimize the likelihood of buying high and selling low.

February 21, 2020 0 comment

Financial Advisors

Can Index Funds Replace an Advisor?

by sshrx_ns3li1 February 21, 2020

written by sshrx_ns3li1

In a few short days – Aug. 30, to be precise – billionaire Warren Buffett will turn 89 years old. Worried investors should note that Charlie Munger, Buffett's sidekick at Berkshire Hathaway (ticker: BRK.A, BRK.B) in Nebraska, is a very sharp 95.If you're wondering at this point what the devil counting birthdays has to do with investing, consider how Buffett wants to provide for Astrid Menks, his wife since 2006. For fund managers, Buffett's 2013 letter to Berkshire Hathaway shareholders might as well serve as a sharp stick in the eye:"One bequest provides that cash will be delivered to a trustee for my wife's benefit," Buffett wrote. "My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund." (He suggested Vanguard, by the way.)The Oracle of Omaha concluded: "I believe the trust's long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers."Or, you could say, Ouch. Buffett insists you don't need a Wall Street type to manage your investments after all. Invest in the index, cut out the middleman and reinvest those saved fees to realize huge rewards over time through the magic of compound interest.The subject of fees and the financial managers who charge them has hardly been a sweep-it-under-the rug affair for investors. The conversation has in fact heated to contentious levels, some of the credit or blame courtesy of the "Freakonomics" public radio show. In case you might've missed it, episode 297, dated March 21, 2018, was titled "The Stupidest Thing You Can Do With Your Money."On it, Stephen J. Dubner reaches a well-reasoned conclusion – backed by financial industry immortals – that the money spent on fees is a waste when compared to the strategy of the passive fund that tracks a market index. He cites a study where only the top 2% to 3% of active fund managers had enough skill to cover their cost. But how far can Buffett's stock market strategy be taken portfolio-wide for the typical investor? After all, 99.99% can't leverage a Buffett-sized fortune and place it in an index fund. Thus many industry experts contend that if you try Buffett's approach as a one size fits all, you might as well climb into a potato sack and call it a three-piece suit."Without an advisor what factors would an investor use to decide which indexes to invest in, at what percentage and how should the investment allocations change over time?" says Ken Stern, senior managing director of Lido Advisors in Los Angeles."I disagree that low-fee index funds are an adequate replacement for an advisor," says John Foxworthy, founder of Foxworthy Wealth Advisors in Fort Wayne, Indiana."These vehicles are changing the concept that an advisor is a 'stock picker,' but there is much more to it than that," Foxworthy says. "The individual exchange traded funds are just ingredients. It takes a good chef to be able to combine those ingredients into a delicious meal.""If the goal is simply to invest money indefinitely then a low-cost index is perfect and a great part of executing a financial plan," says Adriel Tam, CEO and co-founder of Viridian Advisors in Seattle. "However if you have a time horizon like retirement, college planning or a need to use the investments at a later point, then no."Tam's observation raises a salient point: Market index funds and paying an advisor need not represent an all-or-nothing choice."We do not believe the decision to use index funds or to have an advisor are necessarily mutually exclusive," says Geoffrey Sulanke, director of manager research at Davenport & Company in Richmond, Virginia. "Just as you would not try to build a house without a blueprint, you should not approach your finances without making some type of plan before you begin."Ah, ha! No two homes are alike, nor are the resources to build them or the ultimate goals they serve. So getting your financial house in order can be risky business if you spend too much time making sidelong, envious glances at your neighbor's pad.Likewise, no two advisors charge the same amount."There are so many advisors that you can shop around for advisors who charge the least fees," says Mayra Rodriguez Valladares, managing principal at MRV Associates and a bank regulatory and capital markets consultant based in New York. "Always make sure to ask your advisor what he or she invests in to see if they have skin in the game."Investors will benefit from periodically reviewing their assets, how they are allocated and how their efforts to diversify are faring in the stock market.Robert Johnson, a finance professor at Creighton University and longtime follower of Buffett, understands the billionaire's approach in fine detail. Thus he's able to break down The Oracle's proclamation in everyday investing terms.That is: While the numbers say one thing, investors too often do another and it's often frustratingly flawed. So the purpose of a great advisor might be – and often is – to protect people from themselves."The biggest advantage of an advisor is not the financial expertise provided or the investment decisions made," Johnson says. "It's that she will calm you down during times of market turmoil, talking you out of panicking and making sweeping changes to your portfolio."Daniel Kern, chief investment officer at TFC Financial Management in Boston, agrees with this brake on investing emotion."Advisors are a necessary counterweight to many self-destructive behavioral tendencies," Kern says. "It's easy to lose perspective in a soundbite-driven environment that magnifies the natural fight or flight response under stress, which often leads investors to trade too much and to trade at the wrong times."And unfortunately, some investors – even those ensconced in an ETF – feed off manic energy to reckless ends."Anyone can buy an index fund," says Steven Jon Kaplan, CEO at True Contrarian Investments. "A true advisor will keep their clients in alternatives during bear markets even if that means something boring like four-week U.S. Treasurys and/or bank CDs."That said, you could ride out the biggest of bears if you're willing to adopt the supremely patient modus operandi of Buffett. He famously said his favorite holding period for a stock is "forever." And as he closes in on 90, he's as close to that mark as anyone.

February 21, 2020 0 comment

Financial Advisors

11 Things to Know Before Becoming a Financial Advisor

by sshrx_ns3li1 February 21, 2020

written by sshrx_ns3li1

What to know before becoming a financial advisor.
The financial advisor career is among the best business jobs and best-paying jobs, according to U.S. News & World Report’s career rankings. It’s evolved “from a sales and product-driven profession to one centered on providing meaningful financial advice,” says Michael Purpura, president of Wealth Management at D.A. Davidson. “It is incredibly rewarding to help people navigate a series of challenging issues and achieve a variety of substantial end goals,” from college planning to funding a comfortable retirement to leaving a legacy to the next generation. But the financial advisor career isn’t right for everyone. Here are 11 things to know before becoming a financial advisor.

It’s an industry entrenched in tradition.
While the financial industry is evolving, it’s still one steeped in tradition and traditionalists. The average age of financial advisors is over 50 and the industry as a whole is dominated by long-standing names. As such, it can be frustrating to be the new person with new ideas in the room. “Younger advisors need to understand that there are many ideas, processes and people in the industry that have been around for a long time,” says Patrick Brewer, founder of SurePath Wealth and co-founder of Brewer Consulting, a marketing agency for financial advisors. “If you are the kind of person who wants to buck tradition, then financial services may not be for you — unless you are willing to be patient and save your entrepreneurial drive until you are a few years into your career.”

Must love people.
It’s a misperception that the financial services industry is for numbers-people. Financial advisors spend as much time, if not more, managing people than they do crunching numbers. “This is a career based on relationships, and advice tailored to each person’s unique needs, situation and objectives,” Purpura says. “Being genuinely curious about people and their stories is crucial to forging trusted, long-term relationships with clients.” So before you start looking at how to become a financial advisor, ask yourself if you have a genuine curiosity about and affinity for people. Do you like helping people and giving advice? Are you willing to spend the majority of your days in conversation with others?

You should be success-driven, not dollar-driven.
Before becoming a financial advisor, ask yourself what your motivation is for starting a financial advisor career. “If you’re interested in becoming an advisor to make money, you’re doing it for the wrong reason,” says Jeff Cashman, principal partner and lead advisor at Cashman Consulting. “Aspiring advisors should genuinely want to help people and serve as a trusted counselor.” He tells aspiring FAs to be “success-driven, not dollar-driven.” Those who are success-driven want to be the best they can for their clients. “Frequently, young professionals get so attracted to the potential for high commissions that they forget the purpose of their role in the first place,” he says. A lot more goes into your work as an advisor beyond just hunting the big-dollar clients, primarily with building client relationships.

You’ll make less than your college friends initially.
The reason having a motivation to become a financial advisor beyond making money is so important is that you probably won’t be making much money in the early years. “In the first three to five years of your career as a financial advisor, you will probably be making less money than many of the people you went to college with,” Brewer says. “Even if you do everything right and learn quickly, your revenue in the early years will be slow to build.” He advises aspiring financial advisors to set reasonable expectations before becoming a financial advisor. “You will make money if you build your relational capital first, but that won’t happen overnight,” he says. “Your work will pay off if you manage to build a practice, (but) not every brand-new advisor makes it that far.”

Problem-solvers preferred.
“At the end of the day, a great financial advisor is a problem solver,” Brewer says. Your days will be spent helping people solve their problems, which could be financial or personal. Sometimes “money trouble is merely a symptom,” he says, “and you have to connect your clients with professionals or resources to solve deeper issues.” You may come across clients struggling with addiction, communication problems or past trauma. “Solving those problems will allow clients to view you as credible and reliable,” he says. “If you don’t enjoy solving problems or aren’t good at doing it, you will be missing key ingredients for building long-term trust and a successful financial advisory practice.”

There are different types of financial advisors.
Many people mistakenly think all financial advisors do the same thing, but that’s not the case. There are many different types of financial advisors from planning advisors to investment advisors. There are rainmaker advisors who are focused on business development and servicing advisors who focus on existing client service rather than finding new clients, says Paul West, managing partner of Carson Wealth. For aspiring advisors this means two things: First, becoming a financial advisor does not mean you’re stuck in the same role forever. And second, your role will likely involve more than picking investments. “The best advisors are ones who focus on comprehensive, strategic planning and providing sage advice,” West says. “Investments are just a portion of the overall plan.”

A willingness to sell is required.
Like it or not, sales is an integral part of the financial advisor career. “This industry can be unforgiving for those who are unwilling to develop their ability to sell,” Brewer says. Even if you steer clear of the transactional side of product sales, you’ll still have to sell your advice; no amount of degrees or certifications will sell it for you. “Many professionals mistakenly believe that by simply being a fiduciary advisor, their expertise will magically sell itself,” Brewer says. “Selling financial advice means building trust, listening, creating a sense of curiosity and inspiring commitment.”

Self-starters thrive best.
In addition to a willingness to market your services to others, financial advisors need to be self-starters. “This is a profession in which you need to rely heavily upon your own motivation and ability to reach out to your clients,” Purpura says. “You are the driver of your clients’ successes and your own.” Regardless of the type of firm you work for – be it a large broker or on your own as a registered investment advisor – you will need a healthy dose of the entrepreneurial spirit to succeed. “While some individuals thrive on this entrepreneurial aspect of serving as an advisor, this style of working is not for everyone,” Purpura says. Do a little soul searching as you’re researching how to become a financial advisor to determine if sales and being an entrepreneur appeal to you.

You’ll need a niche.
The Bureau of Labor Statistics estimates there are more than 200,000 personal financial advisors in the U.S. Cerulli Associates puts that number at over 300,000. Either way, this means that as a financial advisor you will be competing with hundreds of thousands of others for clients, not to mention the robo advisors. “In a competitive environment, getting very good at helping people with a specific set of needs and gearing your financial advisory practice toward them could help you establish a unique value proposition,” says Bill McManus, director of Strategic Markets at Hartford Funds. Before planning how to become a financial advisor, think about where you’ll find your niche. McManus suggests looking to your network for inspiration: Is it weighted toward any one professional field? Is there an opportunity to work with a set of people you’re already connected to?

You’ll probably want a CFP and to work for a fiduciary.
There are a couple different frequented routes into the financial advisor career path: You could get your FINRA securities licenses, which will allow you to advise on and sell investments, or you could go the purely planning route by getting your CFP. While you don’t need your CFP to take the first path, many advisors recommend obtaining it anyway. “Investing in yourself and achieving the CFP designation will not only make you credible but also allow you to be thorough in your planning capabilities with your client,” West says. He also advises working for a fiduciary: “Don’t put yourself in a situation where you have to choose sales versus doing what is right for your clients.”

The financial advisor career is open to everyone.
The beauty of the financial advisor career is that it’s open and welcoming to anyone. “As a highly-entrepreneurial profession that offers flexibility and the opportunity to build lifelong relationships with clients,” Katherine Mauzy, principal and head of financial advisor talent acquisition for Edward Jones in St. Louis, Missouri, says that “a variety of professionals, including women, millennials and culturally diverse individuals” should consider becoming a financial advisor. In fact, being of a minority group could make it easier to find your niche. Likewise, the financial advisor career needn’t be your first stop: “Backed by excellent financial advisor training programs, many professionals are successfully transitioning mid-career and discovering a rewarding and meaningful career,” Mauzy says.

Things to know before becoming a financial advisor:
It’s an industry entrenched in tradition.You must love people.You should be success-driven, not dollar-driven.You’ll make less than your college friends initially.Problem-solvers are preferred.There are different types of financial advisors.A willingness to sell is required.Self-starters thrive best.You’ll need a niche.You’ll probably want a CFP and to work for a fiduciary.The financial advisor career is open to everyone.

February 21, 2020 0 comment

Financial Advisors

Why It Pays to Know Your Investing Fees

by sshrx_ns3li1 February 21, 2020

written by sshrx_ns3li1

If the tired old cliché applies and the best things in life are free, then surely its opposite does as well and the worst things in life are fee. ATM fees. Concert ticket surcharge fees. Airport tax fees. How shall we count the feeble paths to hair-tearing aggravation?But if you're an investor, perhaps no fee rankles the spirit and wrangles the portfolio quite like the ones investment managers and financial advisors might overcharge.And while it's possible to sweep such charges under the rug as the cost of doing business, investors do so at their portfolio's peril."I see it every week, when I ask investors questions," says Scott Krase, founder and president at CrossPoint Wealth in the Chicago area. "Whether in a meeting, video conference call or on the phone, I ask questions about their current investments. I ask if they know the risk they truly hold and what do these investments cost them. The answer is the same. They don't know."Yes, but they absolutely need to know."Fees take a percentage of a client's return over time," says Ryan Goldenhar, partner advisor at AdvicePeriod and based in San Diego. "The higher the fees, the lower the benefits of compound interest for a client."Albert Einstein supposedly called compound interest the eighth wonder of the world, adding: "He who understands it, earns it; he who doesn't pays it." Safe to say that if he weren't dabbling in the relativity thing, Einstein might well have made a splendid investment guru. For as money accrues in a portfolio, you can easily reinvest it – think of dividends – and create a mountain of money where none once existed.For example, let's take $5,000 with a monthly addition of $10, compounded 10 years over a return rate of 8%. You'll end up with $12,553. Now, let's do it again: You're now up to $28,840. One more time, and in 30 years you've got a whopping $64,000. And all it cost you was 33 cents a day and some patience.If you tried the same thing but did not contribute that $120 – which a financial advisor's commissions and hidden fees could far surpass – here's what happens: You'll have just $50,313 after those same 30 years, or close to $13,700 less. (You can run similar calculations at investor.gov, a website of the U.S. Securities and Exchange Commission.)The trouble is, many people invest greater sums and hence miss out on much more money than that."Fees can be silent killers in a portfolio," says Daniel Kern, chief investment officer at TFC Financial Management in Boston.TFC is independent and "fee only," but don't be confused by the term. It means they fulfill a fiduciary responsibility to always act in their clients' best interest. They do not accept any sales-related fees or compensation, which is where charges really begin to kill an investor."Managing costs and taxes is an important aspect of selecting an advisor or mutual fund," Kern says. "A 1% annual fee on a $500,000 investment at a 6% return over 20 years compounds to more than $180,000.""Over an investors' lifetime, excessive fees can take an astonishingly huge share of the investors nest egg," says Stefan Sharkansky, creator of the Personal Fund analyzer site for advisors and individual investors. "Although some managers do beat the market before fees, it's impossible to know in advance who the lucky managers are going to be."Investors should observe two types of fees, says Carlos Dias Jr., founder of Florida-Based MVP Wealth Management Group and Excel Tax & Wealth Group."With investment advisors, a portfolio manager – the person who's doing the actual investing – might charge 0.5% more or less, while the financial advisor – the person overseeing the account and providing financial advice – might charge 1%," Dias says.When fees pass those amounts, or commissions run high, it's time to take a closer look at your arrangement. Another danger sign: lack of transparency in how an advisor constructs a portfolio, says Mason Williams, chief investment officer at Coral Gables Trust in Florida."Minimal proactive contact from your advisor is a clue," Williams says. "It's important to ask for service expectations up front and what is to be expected as a relationship begins."That's the key word: relationship. Some people need the financial equivalent of a personal trainer to get themselves in ship shape, even if other people can start and follow their own fitness regimen."If advisors are only charging for investment advice, then arguably the fees might not be worth it to an investor," says Matthew Schulte, head of financial planning at eMoney Advisor.Indeed, one way around high fees is to work with a web-based, automated investing platform commonly known as a robo advisor."Depending on an investor's personal financial situation, it might make sense for them to work only with a robo advisor," Schulte says. "If their needs are simple, pursuing a low-cost, low-touch module is certainly one possible way to achieve their financial goals. However, as their needs become more complicated, an investor can greatly benefit from working with a planning-led advisor who can provide recommendations based on their holistic financial picture."And of course not all fees are alike, and an educated investor needs to learn the difference, says Brent Weiss, co-founder of Baltimore-based Facet Wealth."Start by educating yourself on the total fees that you are paying," Weiss says. "Ask your advisor or your service provider for a summary of all fees so you know the true cost."Because in the end, knowing and dealing with the total cost now is far preferable to and cheaper than dealing with it later.

February 21, 2020 0 comment

Financial Advisors

How Women Are Creating Success in Financial Services

by sshrx_ns3li1 February 21, 2020

written by sshrx_ns3li1

When she wanted to start Ellevest, a digital investment platform for women, Sallie Krawcheck approached several large banks for funding. She presented the concept, demonstrated the need and how large the market was, but nobody got it. After one such meeting, the CEO of the bank looked at her and said, "Well, don't their husbands manage their money for them?"In one comment, he encapsulated much of what is behind the lack of gender diversity in the financial industry. Women face stereotypes, doubt and biases from both within and outside the industry. But despite these psychological and financial hurdles, women are creating success in the financial industry. And they're teaching other women how to do it, too.Women Face Higher Hurdles Into the Industry When Catherine Berman and Yuliya Tarasava had the idea for CNote, an investment platform that uses technology to help people invest in a more inclusive economy, they entered in the 2017 SXSW Super Accelerator Pitch Competition. From hundreds of thousands of applicants, the judges whittled it down to 10 finalists. Standing alongside the other finalists onstage, Berman realized something: "Out of a global competition of fintech founders, we were the only women. Every other founding team was 100% male."CNote beat the boys to win the 2017 Best Startup Pitch Company award, but too often women in finance find themselves climbing an uphill battle to success. Women represent less than one-third of financial advisors and less than 20% of leadership roles in financial services firms globally. Women-owned businesses receive only 2% of venture capital in the U.S. The Ripple Effect of More Women in FinanceAs the gatekeeper to wealth, the financial industry is in a unique position to improve diversity by supporting women inside the industry and investing in women-owned businesses outside of it. Such efforts can have a wide-reaching impact."I've found again and again (that) when you support a woman entrepreneur, the effect of that goes far beyond just supporting her and her family," Berman says. "She ends up producing a series of positive network effects that also benefit the community, the local economy and the entrepreneur ecosystem."Berman and Tarasva are is proof of this: Since founding CNote they created The Wisdom Fund, a fixed-income vehicle that enables individual and institutional investors to invest their dollars in women-owned businesses. Likewise with Krawcheck and Ellevest, which is tackling not only gender diversity within the company but also the global gender wealth gap.Women have long been criticized for keeping more of their money in cash than men, thus missing out on investing returns, but "that research doesn't hold up," Krawcheck says.It's not a coincidence that an industry with fewer women does a poor job for women, Krawcheck says. She poses the question: Do you really think if instead of being 95% men, the industry had been 90% women, there'd be a CNBC?"CNBC was fashioned off of ESPN, (turning) investing into a sport," she says. "So the ripple effect here is tremendously important for our society."The Knight Foundation commissioned Harvard University and Bella Research Group to look into the diversity of the asset management industry. They found that women mutual fund managers represent less than 10% of the industry and manage less than 1% of total industry assets under management (AUM)."If we do the math, that means men are choosing the companies for 98% of our economy and look where we are," says Kristin Hull, founder, CEO and CIO of Nia Impact Capital. "The mess we're in was literally man-made, and until we can shift that lens to bring in more diversity, we're not going to get out of the problems we're in."How to Bring More Women Into the Financial IndustryImproving greater gender diversity in the asset management space isn't hard: It starts with choosing female-managed funds and investments that support women. To improve gender diversity in the financial industry more broadly, society needs to change the way it thinks. People have been socialized to view white men as leaders and everyone else as not, Krawcheck says. For gender equality to happen, inclinations to homogeneity need to change, she adds."There's an overwhelming draw to familiarity, to working with people like yourself," Krawcheck says. "Even people who are benefiting from the change can fight it because the drive to status quo is so powerful."She puts the onus for change on CEOs. If a CEO isn't committed to diversity, diversity won't happen. To that end, Krawcheck calls a full-stop on hiring if Ellevest becomes too homogeneous. They won't hire until they find someone who brings a different perspective and background. And before you ask: Yes, she upholds this policy even if the company becomes female-dominated.Hull takes a similarly firm view of diversity at Nia Impact Capital. The company is the first U.S. firm to be Gender Equity Now (GEN) Certified, which recognizes businesses that meet a standard of excellence across five areas of workplace culture including the gender perception gap, a certification Hull recommends all companies undertake."Even if you don't get full certification, you learn so many things that can improve your company practices," she says.But even the most committed CEOs can't hire people who don't apply. "Men are quicker to throw in their resumes than women are," Hull says. "Women are much more likely to apply when the hiring process is transparent."To encourage female applicants, companies should improve transparency, she says. Make the salary window available, let people know how many other applicants there are and, "of course, have women on hiring committees."Not only do women hire more women, but having a female role model when interviewing can be invaluable to women applicants.When Chrissy Lee, co-president and COO of Kalos Financial, interviewed for an operations position at Kalos 13 years ago, one of the first people she met was the company's co-founder and then-COO Carol Wildermuth."She blew me away," Lee says. "She presented herself with such confidence… Even in the interview, she was so open to sharing her background, her challenges, what she had to go through."Lee walked out of that interview thinking, "I want her job."As co-president and COO today, Lee is constantly trying to lift other women up in the field. "If I'm winning at something, I want other people to have that experience as well," she says.How to Be a Successful Woman in FinanceWomen must help other women rise, but you can't lift someone who isn't reaching up. If Lee had never applied to Kalos, if Krawcheck had never set her mind on creating Ellevest or Burman on CNote or Hull Nia Impact Capital, they never would have become the beacons of female success in the financial industry that they are today."It's not easy as women to be in this space right now," Berman says. "But the challenges can spark new thinking – and it's a battle worth fighting."Women shouldn't see the lack of diversity in the financial industry as a deterrent, but rather as an opportunity to pave the way for a better future for everyone.

February 21, 2020 0 comment

Financial Advisors

AI is Improving Investing

by sshrx_ns3li1 February 21, 2020

written by sshrx_ns3li1

AI is changing the financial industry for the better.
Artificial intelligence isn’t coming; it’s here. AI is behind almost every activity people undertake today, from Google’s traffic data to the filters in your email, from Facebook’s face recognition software to Amazon’s product recommendations. AI is even revolutionizing your finances. What began as enabling mobile check deposit has evolved into new ways to monitor, make and communicate investment decisions. Financial firms and investment managers alike are employing AI to invest smarter, faster, cheaper and easier. Here are 11 ways artificial intelligence is improving investing.

Better predictions lead to better investing decisions.
AI and machine learning are enabling asset managers to “assimilate new information more quickly and accurately into their portfolio construction processes,” says Bryan Kelly, professor of finance at the Yale School of Management and head of machine learning at AQR Capital Management. As computing power has increased, so has the financial industry’s ability to capture and analyze data with increasingly rich statistical models. This “translates into better prediction of future economic outcomes, which helps investors better allocate wealth to the most productive opportunities and better manage the risks of their portfolios,” he says. In short, smarter computers make for smarter investors.

Defense against emotional biases.
Behavioral finance has shown that try as they might, human investors are not rational. Investors of all types, from retail to institutional investors, are susceptible to behavioral bias, says Michael Cicero, director of portfolio research and management at High Probability Advisors. You need look no further than the University of Chicago’s sale of equity in 2008 for an example of loss aversion bias, or the emotional bias caused by investors feeling more pain from a loss than pleasure for a gain, by a sophisticated investment committee responsible for the endowment, he says. Irrational decisions such as those prompted by loss aversion “can be as detrimental to long-term expected return as poorly designed investment strategies,” Cicero says. AI can help investors eliminate these biases, thus increasing “the odds of investment success.”

Voice activated investing and research.
Investors don’t even need keyboards to invest anymore thanks to artificial intelligence. Firms like TD Ameritrade are rolling out voice activated investing that lets you place trades, research the markets and check on your portfolio using Amazon.com's (ticker: AMZN) cloud-based voice service, Alexa. With an Alexa-enabled device, you can now stay on top of your investments and financial education from virtually anywhere – even while driving in the car. In-vehicle features let investors query Alexa about the stock market or check account balances and investment performance while on the go. It’s an example of multi-tasking portfolio management, compliments of AI.

Stronger advisor-client relationships.
AI is making it possible for financial advisors to automate certain aspects of client relationships, from initial communications to risk profiling and all the legal documentation that goes with the client-advisor relationship, says Gopal Appuswami, lead of payments, fintech, analytics, products and innovation at LatentView Analytics. “Additionally, by using intelligent information management solutions, staff has the means to simplify how they access, secure, process and collaborate on documentation,” he says. This increases productivity as advisors and their staff are able to find and access information much faster.

Higher quality financial advice at a lower cost.
Behind these stronger financial advisor-client relationships is higher quality advice at a significantly lower cost to firms, Appuswami says. By “offload(ing) routine tasks such as preliminary data collection, research and compliance adherence to robo advisors,” advisors and asset managers can focus their time on “preparing premium strategies and packages for each client,” he says. In essence, it’s computers doing what computers do best so humans can do what they do best. “AI services also allow firms to offer a broader range of financial services for audiences in different income brackets,” Appuswami adds. Advisors can provide better advice to more people at a lower cost thanks to artificial intelligence.

Faster investor communication.
The last time you contacted a financial services firm, chances are your first line of communication was with a form of artificial intelligence. “AI chat bots now serve as the first line of support for retail clients,” says Phil Andriyevsky, a data and analytics leader at EY. While chat bots may not always be able to answer your question, every question a bot answers is one less question that needs to pass across a human’s desk. As a result, AI communication is bringing down the cost of investing for firms and investors. It’s also making communication faster and, for those who prefer digital communication, more pleasant. Unlike human advisors, chat bots can be available 24/7 and don’t necessarily require you to pick up a phone to reach them – unless it’s to chat via a mobile app.

Financial firms give investors what they want.
As digital communication becomes more effective and powerful, financial services firms can use it to create a two-way channel between advisors and investors. “Advisory firms can incorporate preemptive communication, transparent fee structures and even channels for customer feedback on product development,” Appuswami says. This can help firms guide their future product decisions. “By addressing client concerns and incorporating their ideas, firms can efficiently appropriate spending toward products and services that meet client needs,” he says. So just as your feedback helped Oreo pick its next flavor, AI is enabling investors to shape the future of the financial services industry.

Optimized portfolios and faster investor reaction times.
Before AI, “portfolio optimization relied only on human effort, which is time consuming and can’t guarantee a complete compilation and impact of all sources,” Appuswami says. With firms going increasingly digital, more information about indicators that necessitate a portfolio shift is available. Algorithmic programs allow money management systems to track these indicators and automatically adjust portfolios. Faster response times to economic, global and market trends leads to optimized returns for investors, Appuswami says. Likewise, automated portfolio optimization means less strain on financial firms’ human staff to monitor and react to these changing events.

Proactive portfolio management.
Artificial intelligence isn’t just improving investors’ and money managers’ reaction times; it’s also helping them be proactive. It’s not possible for human beings to evaluate all of the market factors that impact a portfolio’s performance, Appuswami says. But artificial intelligence can: “AI services, together with predictive analytics, can track multiple macro- and micro-economic indicators, regulatory trends and social sentiments,” he says. This enables them “to produce insights and timely advice, which financial advisors can leverage to make proactive portfolio rebalancing recommendations or help customers build the right financial management solutions based on the current phase of their life and lifestyles.”

Better risk/reward ratios.
Asset managers are using artificial intelligence and machine learning to broaden their understanding of investment risk. At Alpha Innovations, they’ve “found that in the analysis of financial risk, historical and live time series data provide subtle clues and autonomous patterns that can be used to predict future patterns with strikingly high accuracy,” says Mark Antonio Awada, chief risk officer and data analytics officer at Alpha Innovations. “This affords our asset managers with opportunities for significant improvement in performance and risk/reward ratio.” As a result, a major disruption to conventional investment portfolio construction is under way. “For investors who are seeking rejuvenated streams of returns on their investments, this is amazing news," he says.

Greater access to cost-effective investment solutions.
Thanks to the recent launch of ETFs managed by AI, artificial intelligence is easier than ever to leverage in your portfolio. That said, it will come at a slightly higher cost. The fee investors pay for an enhanced index strategy “will be slightly higher than its passive brethren,” Cicero says. But he predicts this will change: “While partially automated now, we believe artificial intelligence will add significantly to scale and efficiency, driving down price while improving the long term probability of success.” Increased competition as industries outside of financial services make advances in artificial intelligence will force the cost bar down, he says. Who knows, maybe Google (GOOGL/GOOG)will operate the next largest asset manager of the future.

How AI is improving investing.
Better predictions lead to better investing decisions.Defense against emotional biases.Voice-activated investing and research.Stronger advisor-client relationships.Higher quality financial advice at a lower cost.Faster investor communication.Financial firms give investors what they want.Optimized portfolios and faster investor reaction times.Proactive portfolio management.Better risk/reward ratios.Greater access to cost-effective investment solutions.

February 21, 2020 0 comment

Financial Advisors

What Is Direct Indexing?

by sshrx_ns3li1 February 21, 2020

written by sshrx_ns3li1

Index mutual funds and exchange traded funds can offer all-in-one exposure to the stock market through the indices they track. But there's another way to match the performance of a benchmark index without buying into funds: direct indexing.What Is Direct Indexing?"Simply put, it attempts to replicate the performance of an index by purchasing the underlying individual equities instead of using an ETF or mutual fund in an investor's portfolio," says Rob Cavallaro, chief investment officer at RobustWealth.Though the concept has been around for decades, it's only recently begun to move into the mainstream. Digital investing platforms and fractional share trading have made the direct index method more accessible to a broader range of investors, beyond just the ultra-wealthy.With more financial advisory firms and robo advisory platforms offering this option, it could give traditional index funds and ETFs a run for their money.How direct indexing works.The direct index advantage.It may not be right for every investor.How Does Direct Indexing Work?It may sound complicated but it's a simple enough concept."At its core, direct indexing is the idea of owning an index," says Michael Neuenschwander, a certified financial planner at Outlook Wealth Advisors in HoustonRather than purchasing a mutual fund that holds all of the stocks in the S&P 500, for example, investors can purchase shares of all 500 stocks individually. This is made easier through fractional investing."Fractional share trading allows very small amounts of money to be invested in each position, allowing even the smallest investor to participate, Cavallaro says." That's a boon for investors who want to own larger companies, such as Alphabet (ticker: GOOG, GOOGL) or Amazon (AMZN) but doesn't have thousands of dollars to tie up in a single share.Daniel R. Hill, president and CEO of D.R. Hill Wealth Strategies, says this approach hinges on the idea that owning all the securities in an underlying asset class will provide some premium above the index return."This concept was developed when the research showed that the active manager fails to beat the market the vast majority of the time, so investors have a higher probability of success if they just own the index," he says.The Direct Index AdvantageThere are several benefits this approach can offer over other investing strategies. The first is tax-efficiency, says Shana Sissel, senior portfolio manager at CLS Investments in Omaha, Nebraska. "With a direct indexing portfolio, the portfolio manager can go in and harvest tax losses at the individual position level for the client when the opportunity arises," Sissel says.This offers more control over gains and losses throughout the year, while still maintaining the risk-return profile of the benchmark the investor is attempting to match. It becomes easier to optimize tax outcomes and minimize the chances of receiving an unexpected tax bill for capital gains. With an indirect strategy, the entire fund would have to be bought or sold to harvest losses, offering a lower level of customization to investor needs and objectives.Customization also extends to building a portfolio that reflects individual values. "Investors and advisors can select individual securities that align with their ethical and moral beliefs or avoid securities that don't," Cavallaro says. The result is a completely personalized portfolio.Another advantage is reduced operating costs for the do-it-yourself investor who's trading securities from a chosen index themselves through a brokerage account. Kip Meadows, founder and CEO of fund administration firm Nottingham, says cost benefits are realized when the trading account is large enough to absorb transaction costs associated with making trades.When trading index mutual funds or ETFs, investors pay not only transaction costs but the individual expense ratios for each fund. The expense ratio reflects the annual cost of owning the fund, expressed as a percentage. Buying full or fractional stock shares individually avoids that cost.Finally, direct indexing can be a pathway to managing risk."Research shows that investors can reduce company risk by owning more companies," Hill says. "By owning the index instead of some lesser portion of the index one reduces the overall volatility of their portfolio."It May Not Fit Every InvestorWhen considering any new investment strategy, it's always important to look at the potential drawbacks. The first challenge associated with direct indexing is that it requires the willingness to be a hands-on investor."There is an intensive management aspect to it," Sissel says.Indexing directly may be fairly straightforward when buying securities for an index such as the S&P 500. But it can get more complicated when attempting to replicate something like the Russell 2000, where liquidity issues may exist with underlying assets, or an international stock index.Aside from that, the trading frequency may be higher, particularly if the stock market enters a volatile period. That could mean paying more in trading or management fees.Neuenschwander says this is true for both the DIY investor and one who indexes directly with the help of an investment firm or advisor. "If all you're getting for those trading and management fees is the risk and return of the index, the extra expenses may not be worth direct indexing," he says.Comparing transaction fees against fund expense ratios can put costs in perspective."With an index like the S&P 500, transaction costs for 500 securities, even at $5 per transaction, still total $2,500," Meadows says. "If your index portfolio is $250,000, that equals 1%, which is likely significantly higher than a comparable index fund or ETF."For that reason, experts often agree that direct indexing may be most appropriate for investors who have large after-tax investments. Smaller investors, on the other hand, or those who are newer to the stock market may continue to be better served by the simplicity and cost-efficiency of an index fund or ETF.There's also diversification to consider. Hill says investors should take time to understand how a particular index is cap weighted such as large cap versus mid cap or small cap indexes.The Dow Jones Industrial Average, for example, is composed of large cap, blue chip companies. An investor who indexes directly would need to ensure they're balancing out those large cap holdings appropriately elsewhere in their portfolio."For investors where direct indexing does fit, then the natural next step is to determine what combination of indices fit your goals and objectives," Neuenschwander says. That means keeping risk tolerance, risk capacity, which refers to the amount of risk needed to achieve investment targets, and overall portfolio diversification in view.

February 21, 2020 0 comment

Financial Advisors

Investing in Stocks for Beginners

by sshrx_ns3li1 February 21, 2020

written by sshrx_ns3li1

Investing in stocks is simple as more companies have simplified the process and allow beginners to open an account through a website or mobile app.Common stocks allow stockholders to vote on company issues, but most of the time stockholders receive one vote per share. Several companies also give stockholders dividend payouts – these payouts typically change based on the company's profitability. Adding stocks in a portfolio means that you own a small percentage of a company that should increase its growth and value. Beginning investors should note there are two ways to make money from stocks: dividend payments and selling stocks when the share price goes up.How to Invest in StocksInvesting in stocks can be done in many ways. If you would like to form a strategy and manage your own investments, you can open a brokerage account. If you're unsure about where to start, consider opening an account with a robo advisor who will do the work at a lower cost. For those who want more guidance about their retirement plans, turning to financial advisors might be a good solution.For beginners who do not want to do the legwork in managing their portfolio or who are new to investing, a robo advisor could be a great first step, says Rick Swope, vice president of investor education at E-Trade, a New York-based brokerage.The portfolios managed by robo advisors typically consist of exchange-traded funds aligned to an investor's goals, risk tolerance and time horizon. ETFs also provide diversification at a lower cost."Young investors who are just starting out should look to simple solutions like robos and when investors graduate to more complex financial needs, like estate planning, they may turn to the services that a financial advisor can provide," he says.The number of companies offering brokerage accounts has increased, including banks such as Ally Bank. Some brokerage companies provide a simplified version such as Robinhood where investors can buy and sell stocks, ETFs, options and cryptocurrency from a mobile app for free. Although Robinhood doesn't offer trade options for mutual funds or foreign stocks. Stocks can also be purchased in individual retirement accounts such as a traditional or a Roth IRA. This allows investors to grow their retirement money in a tax-deferred account.Competition has spurred many brokerages to slash commission fees, which can add up quickly if you buy and sell stocks, mutual funds or ETFs frequently. Robinhood is not the only company that does not charge commission fees. Starting in October, Interactive Brokers is providing an unlimited number of commission-free trades on U.S. exchange-traded stocks and ETFs along with no account minimums or inactivity fees."Investing has become much easier," says Steve Sanders, executive vice president of marketing and new product development at Greenwich, Connecticut-based Interactive Brokers. "More of your hard-earned money will go straight toward your portfolio and not toward paying fees. I think this will be extremely helpful for beginning investors as well as others who like to save money."How Much Money Should You Invest in the Stock Market?Since many brokerages such as TD Ameritrade do not require a minimum amount to open a trading account, you can start investing with even $100.Discount brokers are a boon for beginners with little money, who are looking to get stock market exposure with smaller portfolios. But a discount broker does not typically provide advice or analysis. Many of these brokers do not require a minimum amount to start an account while some have a low beginning threshold of $1,000. Building a diversified portfolio is the priority for beginners who should consider adding index funds that capture the broader market, Swope says. Mutual funds and ETFs are the easiest solutions since they own hundreds to thousands of stocks and are less volatile than individual stocks. ETFs tend to have low minimums, allowing investors to spread their first $10,000 between a few funds and gain access to a variety of areas in the market, he says."A mix of ETFs, mutual funds and individual stocks can provide even broader diversification between investment vehicles," Swope says. "Bottom line: If you're just getting started, keep it simple."Good Stocks to Invest in for BeginnersChoosing the right stock can be a fool's errand, but investing in high-quality stocks such as blue chips and dividend-yielding ones are often good strategies. One reason investors opt for blue chips is because of the potential for growth and stability and because they produce dividends – these include companies such as Microsoft (ticker: MSFT), Coca-Cola Co. (KO) and Procter & Gamble Co. (PG). Coco-Cola, for example, generates a dividend of 2.9%, and the stock is less volatile as its share price has hovered between $44 and $55 during the past 52 weeks. Dividends can generate much-needed income for investors, especially higher-dividend ones.Another thing for beginners to consider is diversification. Diversifying your stocks and not concentrating on one sector is another advantage. One other tip is to be consistent. An investor's best bet is to invest consistently such as socking away $400 a month.The habit of saving and putting away money regularly is the single biggest decision "young people can make to ensure a good life down the road," says Ron McCoy, president and CEO of Florida-based Freedom Capital Advisors. Automatic investing can help remove the need to make decisions about when and how much to invest, creating consistent investing habits, Swope says. Automatic investing takes advantage of dollar-cost averaging, which often mitigates portfolio volatility over several decades."Instead of investing a lump sum all at once, investments are made incrementally with the same amount at regular intervals on a fixed and automatic schedule," he says.Dollar-cost averaging is a great way to accumulate long-term wealth because you are always the same number of shares which can be beneficial if you're buying during a downtown and paying a lower price before the stock rebounds, says Chris Osmond, chief investment officer at Prime Capital Investment Advisors."This strategy also helps remove emotion because you're systematically investing in a long-term plan," he says.The news cycle about a company's stock performance can be overwhelming. Instead, remove the short-term noise, so you can maintain perspective of your strategy for the long run, experts say."The secret with investing is to remove emotion," Osmond says. "When emotion is removed from the equation, an investor is less likely to sell and buy at the most inopportune times."Billionaire Warren Buffett, a legendary investor, advises people to buy and hold stocks for several decades instead of selling and re-buying them constantly. At a minimum, the stock should be one that an investor would own for at least 10 years, he advises.

February 21, 2020 0 comment

Financial Advisors

8 Facts to Know About Mutual Fund Fees

by sshrx_ns3li1 February 21, 2020

written by sshrx_ns3li1

Understanding mutual fund fees.
Mutual fund fees can be confusing to retail investors because of the different terms to explain how the investment is packaged and managed. Retail investors researching mutual funds can compare mutual fund fees, expenses and other information on financial news sites, experts say. "It's where most professionals start their research," says Craig Bolanos, CEO of Wealth Management Group. Knowing what a mutual fund charges compared to it its peers can help investors if a higher-priced fund is worth buying. Here are eight facts to know about mutual fund fees and expenses.

Know the basics.
Mutual fund fees come in a few different flavors and have different terms that mean the same thing, says Crystal Wipperfurth, a certified financial planner at Bronfman Rothschild. The term load is the fund's sales charge, which is the commission investors pay to the mutual fund company, usually expressed as a percentage of the amount bought or sold. Upfront load fees are paid in the beginning, back-load fees are paid when an investor sells. No-load funds mean no commissions are paid. Another fee is the expense ratio, it can comprise the management fee, which is how the managers get paid. The expense ratio may also contain a "12b-1 fee" – the cost to market the fund. But not all funds have those fees.

Focus on the two main share classes.
Looking at the different mutual fund classes can feel like looking at alphabet soup. For instance, there are A-class shares or B-class shares, to name a couple. There are also institutional and investor shares, all with different trading symbols. Wipperfurth says retail investors should focus on A-class shares and C-class shares. A shares have a one-time, upfront load, which includes the financial advisor commission. It can be as high as 5.75%, which translates to $575 for every $10,000 invested. C-class shares do not have an upfront sales charge but can have a back-end sales charge if it is sold within the first 12 months. Both A- and C-class shares may have a yearly expense ratio but the A shares tend to have lower expense ratios.

Determining which share class is better.
Investors may choose C-class shares automatically to avoid the A shares' upfront loads but they should think twice about the purpose of buying a particular fund. Investors should consider how long they intend to hold the fund when deciding which share class ultimately will be less costly. "The longer the holding period, the more appropriate the class A share might be simply because it has lower on-going expenses even though it's got the drag of the upfront commission," Bolanos says. Investors who plan to only hold the fund for a short time may want to opt for C-class shares. The Financial Industry Regulatory Authority, known as FINRA, has a calculator that can help determine how long it would take to hold a fund to make an A-share fund more cost-effective, he says. Generally, A shares can be more cost-efficient for investors who plan to hold it more than three years, Bolanos says.

Fees affect performance.
Although mutual fund fees have different structures depending on the share class, the bottom line is that's the cost to compensate the financial professional, says Aaron Benson, portfolio manager at Baird Private Wealth Management. That cost affects performance and affects what an investor received. In upfront commissions, the fee is subtracted before the money is invested. Yearly expense ratios are taken out of the fund's assets. "That's all reflected in the fund's performance," he says. Investors buying A shares should be aware of breakpoints as larger investments can mean a lower upfront sales load, he says.

Mutual fund fees are falling.
Ben Johnson, director of global exchange-traded fund research at Morningstar, says mutual fund fees as a whole are down from years past as cheaper index funds are taking a bigger chunk of investors' portfolios. Johnson's April 2019 research paper shows that the asset-weighted average expense ratio for active and passively managed mutual funds and ETFs combined was 0.48% in 2018 – that's significantly cheaper compared to 0.93% in 2000. This ratio has fallen every year since 2000, he says. The growth in target-date series funds and the default choices of index mutual funds in most 401(k) plans is one example of how index mutual funds are becoming more popular, he says.

Active mutual funds charge more.
The asset-weighted average fee for actively managed mutual funds in 2018 was 0.67% compared to 0.71% in 2017, while the average fee for the passively managed mutual funds was 0.15% in 2018 – down from 0.16% in 2017. Johnson says active mutual funds charge higher fees because it's related to the cost of creating the portfolio and delivering the strategy to the client. "Index portfolios have a meaningful advantage over actively managed portfolios in that respect because the index methodology can be boiled down to an Excel spreadsheet or a Word document," he says.

Higher fees occur in more complex strategies and sectors.
Johnson's research shows the average fund cost for an actively managed U.S. equity fund in 2018 was 0.7%. Those costs rose to 0.82% on average for an international-equity fund and as high as 1.35% for an alternative strategy active mutual fund. He says there are a few reasons for the differences in costs. Part of it is the cost of creating the strategy as the cost to build and maintain a portfolio of foreign stocks, for example, can cost more, especially as an active manager tries to hew closely to the benchmark. But other times, "the case for higher fees might not hold water," he says.

More to investing than just fees.
Bolanos says controlling costs and fees are important, "but it doesn't mean we should be just investing in things that cost zero." He says investors should look that what the investment represents and what it offers. Actively traded mutual funds that invest in niche areas like biotechnology or artificial intelligence may take more research time and will have a higher cost. "Where else can someone can exposure to those sectors," he says. "You can't unless someone creates it. If that's the only way to get access, it is what it is. But we owe it to ourselves to make sure there's a process and the selections are fair."

Facts to know about mutual fund fees:
Know the basics.Focus on the two main share classes.Determine which share class is better.Fees affect performance.Mutual fund fees are falling.Active mutual funds charge more.Higher fees occur in more complex strategies and sectors.There's more to investing than just fees.

February 21, 2020 0 comment

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