Do You Need a Financial Adviser?

Finanacial AdvisorAs investable assets grow, many people start to wonder if they should hire a financial adviser. Most advisers will charge a percentage of the assets under management, typically 1%. That means you will be paying $10,000 per year for advice if you have $1 million in investable assets. You will also have to pay the investment fee for each fund the adviser purchases for you. That seems like an awfully large sum of money to have someone tell you what mutual funds to invest in. True, some financial advisers charge a fixed fee. This is much better if you can negotiate a relatively low fee. But beware of investment advisers who are pushing financial products that will enrich themselves. These are things like annuities or whole life insurance policies. The adviser will be paid a large commission, and you will be locked into a high-fee poor-performing asset.

Investing can actually be pretty simple. I will tell you how to invest your portfolio for free. You will be in charge. Your only cost will be the small investment fee charged by the fund company for each mutual fund you buy.

One portfolio that many people use is called the 3-fund portfolio. It consists of the total stock market (TSM), total international stock markets with U.S. stocks removed (TISM), and the total bond fund (BND). Most people’s needs can be accommodated with just these three funds. You should also decide on an appropriate asset allocation (AA), meaning what percent of your portfolio should be stocks versus percent of bonds. You should also figure out the percentage of domestic to foreign stocks.

A good rule of thumb for bonds is that your percentage of bonds should equal your age. Cash holdings are often lumped in with bonds. Some people who are willing to take on more risk for the possibility of higher earnings go with bond percentage equal to age minus 10 or 20. Just make sure that you do not set your risk so high that at the next market downturn you see a large loss, panic, and sell.

A rule of thumb for foreign stocks is 15 to 25% of your total stock holdings.

So, a married couple who are 50 years old should have 50% of their portfolio in bonds and cash. Note that cash is best for your stable reserves, such as your emergency fund of 6 to 12 months expenses.

The other 50% of their portfolio should be invested in stocks. Of these, 80% should be in TSM and 20% in TISM. This gives a total asset allocation of 40/10/50 percent US stock/Intl stock/bonds.

The 3-fund portfolio keeps investing simple at minimal cost. The Vanguard TSM has an annual cost (also known as the expense ratio) of 0.05%. The Vanguard TISM has an ER of 0.15%. The Vanguard BND has an ER of 0.1%.

There are many alternatives to the 3-fund portfolio, but none are less expensive. Some people, however, find that even the 3-fund portfolio is too complex. They do not want to worry about their AA. A target retirement fund can be a good alternative. The Vanguard 2025 target retirement fund holds 49.4/21.5/29.1 US stock/Intl stock/bonds with an ER of 0.17%. This seems a little aggressive to me, but could be OK for many people. The 50-year old couple could use the 2020 retirement fund if they want less stock risk. Note that the target 2010 fund, which is already past its target date has an AA of:

41.9% Total Bond Market II Index Fund
29.2% Total Stock Market Index Fund
14.1% Inflation-Protected Securities Fund
12.7% Total International Stock Index Fund
2.1% Prime Money Market Fund

which is essentially the same as 29.2/12.7/62.1 TSM/TISM/BND

This is the AA that most Vanguard target funds will end up with when they reach their target date.

So, please tell me why you think you need an investment adviser when you can use the 3-fund portfolio or a target date investment fund at minimal cost. Save your money and do it yourself.

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