Advertiser Disclosure

Investing

How Much Does a Financial Advisor Cost?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

couple talking to a financial advisor
iStock

Spending money to save money may seem counterintuitive, but hiring a professional can be one of the best ways to ensure you’re on the right track to meet your financial goals. From preparing for retirement to diversifying your investment portfolio, financial advisors can make sure all your ducks are in a row.

But how much do they cost? And who, exactly, are they?

What does a financial advisor do?

Broadly speaking, financial advisors are professionals who assist their clients with all manner of financial planning, from allocating invested assets to preparing for long-term financial goals like retirement.

But there’s no one set, formal designation that all financial advisors must acquire — which can present a danger to the consumer.

Malik S. Lee, the founder of Atlanta-based wealth management firm Felton & Peel, explained that there are “about 140 to 150 different designations out there,” resulting in a dizzying alphabet soup of certifications and honorifics. But regardless of how official they sound, not all these so-called “certifications” are actually rigorous programs, and some may not be overseen by a governing board or body.

Before you hire any financial advisor, your best course of action is to look up your potential planner’s designation in the Financial Industry Regulatory Authority (FINRA) database. You’ll be able to see exactly what kinds of hoops they had to jump through as well as any listed complaints or disciplinary measures. This can help you ensure that your advisor’s knowledge and recommendations are worth the cost of their services.

How much does a financial advisor cost?

How much a financial advisor costs depends on a variety of factors, including where you live, what kind of financial advisor you’re talking to and and the specific financial advice you’re seeking. In general, financial advisors operate under one of the following common fee structures.

Commission-based

As in any other commission-based sales industry, financial planners who use this pay structure receive a certain fee when they sell a specific product — often an annuity, life insurance plan or mutual fund. According to Lee, these fees usually are expressed as a percentage of the product’s purchase price, ranging from about 2.5% to 7% for annuities and 5% or 6% on mutual funds.

Fee-only

Fee-only financial advisors don’t sell specific products for commission but rather offer their planning services for a given fee, which might be assessed in a few different ways. The most common are flat fees, hourly rates or percentages of assets under management.

  • Flat fees are just that: pre-negotiated rates you agree to pay for certain financial planning services. Depending on the firm and the specific service, they might range from about $750 to $5,000 and may or may not include a set amount of follow-up time during which you can ask questions or make changes. Always be sure you’re clear about exactly what’s included in the flat rate before you sign any paperwork.
  • Hourly rates are charged per hour worked and may fall anywhere from $150 to $450. Typically, higher rates will be charged by more seasoned planners or those working at their own firms, whereas larger firms are able to pool their time and resources in order to keep their hourly rates lower.
  • Assets under management (AUM) are fees charged as a percentage of the value of the assets you entrust to the financial planner. The average AUM cost has been “working its way down over the course of the years,” according to Lee, and now sits at about 1% to 1.25%. “If you’re paying more than that,” said Lee, “you’re overpaying.” But it’s important to keep in mind that some advisors require a minimum AUM fee — that is, a minimum payment to the advisor. That might mean you’re getting a less generous deal if you have less money. For instance, if you place $100,000 of assets under the management of a company whose AUM charge is 1% but that requires a minimum AUM fee of $5,000, you’re effectively paying 5% — despite the apparently low AUM charge.
  • Other payment configurations also may be available depending on who your advisor is. For example, Lee’s firm offers financial planning services for a set monthly rate, while other planners might charge a percentage of your total net worth or income as opposed to a percentage of your assets under management.

Fee-based

Fee-based financial advisors are a composite of the above two structures: They perform comprehensive financial planning for their clients for one of the fee structures listed above but also sell products for a commission.

Other financial advisor fees and tangential costs

Along with the fee structures listed above, you may be responsible for other costs associated with financial planning services, such as:

  • Performance-based fees for hitting benchmarks, expressed as a percentage of your gains above a certain, preset threshold. These are sometimes known as “fulcrum fees.”
  • Flat fees for a la carte services or products, such as when you purchase a life insurance policy from a fee-based financial planner.
  • Investment-related fees, such as trade commissions or mutual fund management fees.

Not ready for a financial advisor’s cost? There are other options

Although some financial advisors, including Lee, prioritize making financial planning affordable even to those who don’t have towering net worths, professional help can be costly — and today’s all-digital world makes it easier than ever to DIY your finances.

For example, robo-advisors like Wealthfront and Betterment make it possible to create a diversified investment portfolio without too much research and at potentially lower rates than some financial planners. You also can open your own investment account with a brokerage like Fidelity or TD Ameritrade and take on the task of allocating your assets yourself.

Apps like Stash and Acorns make investing as easy as downloading an app and parting with a spare $5 — even if you know absolutely nothing about the market. But therein lies the rub, according to Lee: Because we do have so much access and information at our fingertips, it’s easy to DIY ourselves into a major financial flub.

By hiring a financial advisor, you can help safeguard yourself against financial accidents, such as undercontributing to your retirement plan or accidentally triggering an additional taxable event. Although technology has changed the face of financial planning, in many ways for the better, there’s no such thing as a piece of software that can create a comprehensive, personalized financial roadmap. To quote Lee, “You still need a human for that.”

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jamie Cattanach
Jamie Cattanach |

Jamie Cattanach is a writer at MagnifyMoney. You can email Jamie here

Advertiser Disclosure

Investing

How to Trade Stocks for Beginners

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Learning to trade stocks can be an excellent way to build long-term wealth. There’s a reason why the news reports on the stock market all the time — after all, it’s one of the most important parts of the economy. But if you’ve never traded stocks before, all this information can seem confusing and overwhelming. How do you even get started?

This beginner’s guide provides the basics on how to trade stocks. Whether you’re investing for the very first time or just need a refresher of the key concepts, we’ve covered them here.

What is a share of stock?

A share of stock represents a small ownership stake in the business. When a company such as Amazon or Nike needs money but doesn’t want to take out a loan, they can sell stock to investors.

When you buy a share of stock, you become a shareholder of a company — a part owner, in other words — and are entitled to a cut of the company’s profits. Some companies send cash directly to their stockholders, called a dividend payment, giving them their share of the year’s earnings.

Investors also make money by buying stocks, waiting for them to become more valuable, and then selling them. While you can buy shares of stock from a company directly, the most common way to buy and sell stocks from other investors on a stock market — also called a secondary market — like the S&P 500 or Nasdaq. When investors buy and sell shares on the stock market, it’s called trading stocks.

The price of a stock changes every day based on how people think the company will do. If its future prospects look good, the price will likely go up. If a company gets bad news, its stock price could go down.

How do you trade stocks?

  • Brokerage account: A brokerage account lets you buy and sell stocks and other investments. You can open one with online stock brokers, transfer money to your brokerage account and figure out which trades you’d like to make. This is the most do-it-yourself approach to trade stocks.
  • Mutual funds/ETFs: Rather than buying individual stocks, you could also buy mutual funds and exchange traded funds (ETFs). These are portfolios of stocks managed by a professional investor. When you buy in, you automatically get a share of a large, diverse portfolio so you don’t have to plan it together yourself.

Peter Creedon, a CFP and the CEO of Crystal Brook Advisors in New York, thinks this is a solid approach for beginners or investors with limited funds. “A person can get exposure to the 500 largest companies on the NYSE with just one fund,” said Creedon. He also recommended that beginning investors build exposure to many companies and possible sectors of the market, before going after an individual stock.

  • Financial advisor: If you’d like more help, you can also hire a financial advisor to suggest stocks or even manage the portfolio on your behalf. You’d need to pay them an additional fee for this advice. Some charge by the hour while others could charge a percentage of your portfolio, like 1% of your account balance each year.
  • Robo-advisor: Combining aspects of conventional financial advisors and brokerages, robo-advisors use computer algorithms to recommend stock portfolios based on your goals and preferences. They charge management fees, but they’re usually less expensive than hiring a financial advisor.

How do you invest with stocks?

Before you start putting money in the stock market, you need to figure out your investment goals. Some of the main factors to consider include:

  • Time horizon: How soon will you need your money back? If retirement is decades away, you can afford to take more risks with your stocks, perhaps buying stocks of smaller companies with more growth potential. But if you need money in a few years, you’d likely want to play it safer by purchasing stocks of more established companies, known as blue chips.
  • Risk tolerance: Imagine your stock portfolio lost a bunch of money today — 10%, 20%, even 50%. How would you feel? If losing money would really rattle you, it may be better to use safer stocks and even keep more money in cash or bonds. On the other hand, if you are OK dealing with short-term losses in exchange for higher future gains, you could be a better fit for riskier strategies like day trading.
  • Target return: How much do you hope to grow your money year after year? Investing is a trade-off between risk and return. If you want to earn more, you may need to take more risks and buy stocks with more growth potential, rather than proven blue chip companies. Just know that aiming for a higher return increases your chance of losing money.
  • Income needs: Do you need cash coming in from your stocks right away? Consider high-dividend stocks that pay out more now. In exchange, their price likely won’t gain value as quickly as growth stocks, which reinvest profits so the company hopefully earns even more in the future.
  • Amount to invest: What is your investment budget per year? Some brokerage accounts, funds and financial advisors require at least a minimum investment, for example, you may need at least $10,000. Your budget could determine your investment options.
  • Other investments: What are you doing with the rest of your savings? If it’s in safe places like cash or bonds, you could potentially afford to take more risk with your stock portfolio. On the other hand, if your money is in gold, real estate and other potentially riskier investments, you may want to be more conservative with your stocks.

How do you decide which stocks to buy?

With your goals in-mind, you can start reaching which stocks to buy. Now, without a crystal ball, it’s impossible to know ahead of-time which stocks will earn a great return. But there are strategies that can help you chances.

Bill Harris, a CFP® and financial advisor based in Massachusetts, recommends that you keep it simple. “Invest in companies that you know and that a third grader can understand.”

A different strategy would be to target sectors where you have specialized knowledge, because this can give you an edge versus the average investor. For example, if you have a science or medical background, you could focus on pharmaceutical stocks.

Research companies before you buy their stock

Putting in the proper research is also important as you figure out which companies will succeed in the long-haul. The internet and TV are full of financial news but Harris says don’t overlook your local library. “Most library systems have access to Valueline, CFRA and Morningstar. These companies do not make markets in securities, so their research is pure.”

Another useful strategy is to focus on diversification, also called asset allocation. This means you buy a mix of stocks and other assets so you don’t put all your eggs in one basket. For example, let’s say you buy both car and oil stocks. If the price of oil goes down, that might be bad for oil profits but could lead to customers buying more cars. As a result, your car stocks go up and balance off your oil stock losses.

Finally, you could use a stock market simulator to test your strategy without taking any risk. These tools let you virtually invest in stocks with play money, so you can see whether your ideas would be successful before you commit your actual savings.

What’s the difference between day trading and investing?

As you figure out your strategy, you need to decide whether you’d like to day trade or invest for the long-term. Day trading means you’re buying and selling stocks frequently throughout the day based on the most recent news. Investing in stocks takes a longer-term horizon and you’re buying stocks and holding them for months, even years.

While day trading may seem more interesting, it does have its downsides. Each time you buy or sell a stock, you need to pay trading fees. You could also owe higher income taxes on your stocks, as the IRS charges a higher tax rate on short-term gains, stocks that you sell within a year of buying. Not to mention, you’re also trying to outmaneuver all of Wall Street. As a result, making money with day trading can be stressful and challenging.

Investing may be a better strategy

The financial advisors we spoke with for this article all came out in favor of investing as a more profitable strategy. “Too many people hear a hot tip, jump in, and check the stock every five minutes. My mantra is ‘Become the owner of a company, not a trader’,” said Harris.

Harris also recommends patience with your picks and that you shouldn’t sell at the first hint of bad news. “I commit to staying invested in each position for at least one year. One year from now before I even look at the stock performance, I will make the decision if I still feel the same way about industry and that company.  At that point, I will either sell or buy more.”

Where can you get help buying stocks?

If investing in the stock market for the first time seems intimidating, well that’s because it can be. There’s a ton of information to learn, especially if you try to do everything by yourself. As a beginner, consider getting some help with your first trades. Whether it’s working with a live financial advisor, a professionally mutual fund/ETF or even a robo-advisor, all these methods would get you started on the right foot.

“For beginners, I would recommend they hire a certified financial planner to prepare a financial plan, understand their risk profile and set up an overall target allocation,” suggests Clark Randall, CFP and founder of Financial Enlightenment based in Texas.  “After the planning phase, they can either invest themselves or hire the planner to implement the recommendations.”

Learning how to trade stocks takes some work, but the returns could be well worth it. Between the information in this guide and the support of a professional advisor, you can feel confident about investing in stocks, even as a beginner.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

David Rodeck
David Rodeck |

David Rodeck is a writer at MagnifyMoney. You can email David here

Advertiser Disclosure

Investing

Everything You Need to Know about Spousal IRAs

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

A spousal IRA is an investment strategy used by married couples to save for retirement. There is no separate type of individual retirement account called a “spousal IRA” — rather, it’s just a traditional IRA for a married person who isn’t earning an income. IRS rules allow spouses who aren’t earning income, for whatever reason, to still use the tax advantages of saving and investing money in an IRA to accumulate a nest egg for retirement.

What is a spousal IRA?

The IRS requires individuals to report annual income in order to fund an IRA — with the exception of a spouse who isn’t earning an income, but is married to someone who is. If both partners in the marriage file taxes jointly, the IRS lets each partner have their own IRA. Married couples who file taxes separately are not eligible for the spousal IRAs approach.

According to Janice M. Cackowski, a financial advisor with providence Wealth Partners in Ohio, the IRS looks at married couples who file jointly as one entity, and their combined income as one figure, so spousal IRAs allow them to put away twice as much.

“Spousal IRAs are terrific tools when one spouse is employed and the other is not,” said Cackowski. “It allows the spouse who is earning wages to deposit them an IRA for the benefit of the non-working spouse, essentially allowing each spouse to maximize their retirement savings.”

Basic spousal IRA rules

  • The tax filing status of the couple must be “married filing jointly”
  • The married couple does not co-own a spousal IRA — it is owned by and held in the name of the non-working spouse
  • Spousal IRA can be a Traditional IRA or a Roth IRA
  • There is no longer an age limit for making contributions to a Traditional IRA, so you may keep adding money after age 70 ½, as has always been the case with a Roth IRA

Like any other IRA, married people making use of a spousal IRA strategy contribute funds to their separate accounts and invest the funds in stocks, bonds, CDs and other assets. Interest accumulates over the years, and the account grows either tax-free or tax-deferred (more on this in a bit).

For example, if you contribute $6,000 a year to your IRA starting at age 30 until you retire at age 65, the sum would grow to more than $700,000, assuming a 6% annual rate of return. This figure doesn’t account for taxes (so it’s not entirely exact), but it does show how the power of compound interest can work in your favor over time.

What are your spousal IRAs options?

Your spousal IRA can be either a Traditional IRA or a Roth IRA. The rules and contribution limits for spousal IRAs are no different than conventional versions of either account. Remember, the difference between a Roth IRA and a Traditional IRA comes down to when you can reap the tax benefits of each option, and Traditional IRAs may provide tax deduction benefits.

  • Traditional IRA: Contributions to a Traditional IRA are made before you pay income tax. As such, you end up paying income taxes on all withdrawals — principal and interest earned — when you withdraw funds in retirement.
  • Roth IRA: Contributions to a Roth IRA are made after you pay income taxes. Since you’ve already paid taxes upfront, money you withdraw in retirement is tax free.

Which should you choose? In general, if you’re in a lower tax bracket now than you expect to be when you retire, then a Roth IRA may be more beneficial, as you may save money on taxes down the road. This decision is unique in each situation.

Spousal IRA contribution and income limits

For 2020, the annual contribution limits for both Traditional IRAs and Roth IRAs is $6,000, or $7,000 if you’re 50 or older. This is the core benefit of a spousal IRA: A married couple can potentially sock away a total of $12,000 into their IRAs.

There is no income threshold for contributing to a traditional IRA, while the limit for contributing to Roth IRAs is $206,000 for married couples filing jointly. Also, In addition, for both Roth IRAs and Traditional IRAs, the married couple must have taxable income that is equal to or greater than the total amount contributed to their IRAs.

Spousal IRA tax deductions

Couples can deduct their contributions to a Traditional IRA from their taxes, depending on two factors. The income tax deduction is reduced or eliminated entirely depending on the couple’s total income, or the earning spouse’s participation in an employer-sponsored retirement plan.

If the spouse who works is covered by their employer’s retirement plan, the Traditional IRA income tax deduction is phased out when the couple’s income falls between $104,000 and $124,000. Incomes above $124,000 get no tax deduction.

However, if the spouse does not participate in an employer-sponsored retirement plan, the deduction phases out at an income level of $196,000, and is eliminated after income hits $206,000. There are also tax credits available — the Saver’s Credit — for married couples filing jointly who earn less than $65,000 a year.

Spousal IRA withdrawals

Because IRA funds are intended for use in retirement, withdrawing them before that time often comes with a penalty. For traditional IRAs, there’s a 10% penalty if you withdraw funds before age 59 ½, and you also must pay taxes on the money you withdraw. For Roth IRAs, you can withdraw the funds you contributed at any time penalty free, since you already paid taxes on them up front, but you’ll pay a 10% penalty on any earnings if you with withdraw them sooner than five years after the account was opened or before age 59 ½ (whichever is longer).

For both traditional and Roth IRAs, there are some exceptions to early withdrawal penalties for things including death, disabilities and a first-time home purchase.

Who should consider a spousal IRA?

Any family with a non-working spouse and disposal income for long-term savings that is looking to increase their retirement nest egg should consider a spousal IRA as a potential option.

According to Michelle Buonincontri, an Arizona-based certified financial planner and certified divorce financial analyst, spousal IRAs help protect the non-working spouse in the case their happily ever after doesn’t end quite so happily.

“Let’s face it, with 50% or more of first marriages ending in divorce, spousal IRAs are a great way to level the playing field by having retirement assets in the name of the spouse that does not have access to a retirement plan if a couple ever find themselves in a divorce situation,” she said.

Although retirement assets accumulated during the marriage are usually considered marital assets, Buonincontri suggested that “folks seem less emotional about letting the other spouse keep accounts titled in their own name and less tense during the marital settlement negotiation process.”

Spousal IRAs aren’t for all couples

This doesn’t mean contributing to a spousal IRA is right for every couple, however. While spousal IRAs are generally a positive investment, people need to take a hard look at their financial situation to make sure funds won’t be needed elsewhere.

Diane Pearson, a certified financial planner with Pearson Financial Planning in Pittsburgh, Penn., noted that a spousal IRA isn’t always the first move couples should make with disposable income.

She advised that couples should build their emergency fund and general savings before opting for a spousal IRA. Savers don’t want to set themselves up for additional taxes or early withdrawal tax penalties if they end up needing to pull funds out of an IRA to pay for near-term emergencies or a child’s education before age 59 1/2.

“Every situation is obviously different, but if an employer is offering the working spouse a match to a qualified retirement plan, and the individual instead decides to use their income to fund their non-working spouse’s IRA, they may be missing out on the employer’s matching contribution,” said Pearson.

How to open a spousal IRA

As we noted in the introduction, a spousal IRA is a strategy, not a distinct type of individual retirement account. Whether you choose to set up your spousal IRA as a Traditional IRA or a Roth IRA, you can do so through most banks, brokerage and wealth management firms, as well as robo-advisors.

For more help determining which might be best for your IRA needs, visit our list of the best IRA account providers, and the best robo-advisors.

How hands-on you want to be when it comes to managing your IRA will help you decide which route to go. While some providers will do all the work for you, you’ll pay for that help in the form of management fees, other brokers give you complete control over your portfolio and you save on fees.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Julie Ryan Evans
Julie Ryan Evans |

Julie Ryan Evans is a writer at MagnifyMoney. You can email Julie here