Learn what it is like to work with an investment advisor, what fees to expect, and the impact investment advisors can have on your investment strategy.
Investment Advisors vs. Financial Planners
Investment advisors select financial assets like stocks, bonds, and mutual funds, then buy, sell, and monitor them within your account in keeping with your investment goals. Some investment advisors work holistically, looking at all aspects of your financial life and putting together a comprehensive investment plan—a process often called wealth management. Other investment advisors have a more narrow focus, such as expertise in dividend-paying stocks or municipal bonds. People often confuse investment advisors with financial planners. While there is some overlap, investment advice is different from financial planning. Financial planners and financial advisors deal with matters such as savings and budgeting, mortgages and loans, and life insurance. When they advise on investments, it’s usually mutual funds rather than specific securities. Some financial planners may also be stockbrokers and able to trade for clients, but they rarely have discretionary power over an account. Distinctions between the two often blur because some investment advisors—especially the wealth-management type—offer basic financial planning advice too. Like financial planners, investment advisors must understand your basic financial goals, including when you’ll need to use your money and what you’ll use it for. They must gather personal and financial data about you, taking the time to understand your risk tolerance, your expected rate of return, and your financial capacity to incur investment losses.
Topics to Cover With an Investment Advisor
Investment advisors focused on wealth management discuss specific issues when structuring your portfolio. In particular, they might tell you:
What to invest in Whether to buy stocks or mutual funds If you should invest in index funds or actively managed funds Which investments to use inside of your retirement accounts Which investments you should own in non-retirement accounts What risks are associated with each investment The expected rate of return you might receive from your portfolio What types of taxable income your investments will generate How you can rearrange investments to reduce taxable income What taxes you will incur when you buy or sell investments
Narrowly Focused Investment Advisors
You might also need the services of an investment advisor with a specific specialty, as opposed to one with a view toward overall wealth management. Some examples include:
You own a lot of one company’s stock and need to find someone who writes options on this stock. In this scenario, a protective put strategy could be particularly useful.You inherit a large portfolio of stocks or bonds and need to find someone to help you manage these assets or sell out of them.You want to create a bond ladder for retirement income and need to find an investment advisor who specializes in constructing this type of portfolio.
How Investment Advisors Charge
Most investment advisors charge an annual fee that’s a percentage of the assets managed on your behalf. This percentage is usually higher for smaller portfolios and shrinks as the portfolios get larger. For example, Vanguard charges a 0.3% annual fee for an account investing $50,000, but Edward Jones charges 1.35% in program fees for fund accounts starting at $25,000. Instead of, or in addition to, asset management fees, some investment advisors may charge in any of the following ways:
An hourly rateA flat fee to complete a review of your existing portfolioA quarterly or annual retainer feeA combination of fees and commissions
It is important to always ask investment advisors for a clear explanation of how they are compensated. Every investment advisor is also required to provide you with a disclosure document drawn up in accordance with the requirements of the Securities and Exchange Commission (SEC). Officially called the Uniform Application for Investment Adviser Registration and Report by Exempt Reporting Adviser, it includes a section known as Form ADV Part 2 that discloses compensation formulas and any potential conflicts of interest.
The Bottom Line
Investment advisors’ styles and strategies vary tremendously. In general, though, advisors should always offer a clear, easy-to-understand description of their basic money management approach. They will want to know where all your investments and accounts are—even the ones they aren’t managing—so that your portfolio as a whole makes sense. They won’t make recommendations until they understand your time horizon, your level of experience with investments, your goals, and your tolerance for investment risk. More than likely, unless you’re a client who thrives on risk, they won’t suggest that you put all your money in a single narrowly focused investment, like an oil well in Venezuela, for example.
