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Investing

What’s a Financial Advisor and Do You Need One?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

When you’re just starting out in your investing journey, you may feel a bit overwhelmed about where to put your money. If you’re looking for real help, you might turn to a financial advisor.

But what is a financial advisor, and how do they differ from others giving investment advice? Make sure you know the difference between an accredited professional and someone who may not have your best interest at heart.

What is a financial advisor?

A financial advisor is essentially anyone who provides financial advice. There isn’t a lot of oversight, which means anyone who claims to have knowledge about money can call themselves a financial advisor.

Sally Brandon, a senior vice president at investment management firm Rebalance, said it’s an unregulated title.

“The term ‘advisor’ is problematic,” Brandon said. “Just about anybody who sells stocks or insurance products to earn a commission can claim to be a financial advisor.”

Brandon suggested hiring a registered investment advisor (RIA) to manage your money. “If you hire an RIA, you have hired a person or a firm that is a fiduciary, which means that person or firm is required by law to act in your interests ahead of their own,” Brandon said. “No crazy hidden fees and no misguided investment ideas that don’t fit your needs just because they get a commission out of it.”

Having a fiduciary means a financial specialist is working in your best interest — not their own.

Brandon also suggested hiring a Certified Financial Planner (CFP). CFPs can help you analyze where your money will be put to its best use: investments, retirement or even saving for your child’s education. CFPs don’t just help with investing; they help with money management. While you don’t need to find someone who is both an RIA and CFP, consider what your financial needs are and what you hope to get out of the relationship before deciding who to hire.

What does a financial advisor do?

Your advisor is meant to serve as your money friend. They should discuss which investments are best for you, what each type of investing could be most beneficial and how best to manage your money. The best kind of advisor makes sure you’re making worthy investments for you — not for them.

When you work with a financial advisor, they’ll go over how much money you need for your different investment interests, such as stocks, bonds and mutual funds. For example, talking to an advisor — as opposed to simple money management — could help you strategically navigate a large amount of money you’ve recently come into. Depending on what you need, talking to a real person may be a better option than a robo-advisor.

What are robo-advisors?

A robo-advisor is exactly what it sounds like: a robotic financial advisor. Instead of a human managing your money, algorithms and computer programming can automatically set up and manage your investments.

When you sign up for a robo-advisor, you’ll answer a few questions about your investment preferences. Your portfolio is then selected based on your specific requests and needs.

Many robo-advisors still offer access to a CFP, but Brandon said some companies forget that real humans matter. “Most robo-advisors are too heavy on the ‘robo’ part,” Brandon said. “There’s nobody there to talk to, and if you do get a number it’s a distant call center, not your advisor.”

Not all robo-advisors are the same, but if you prefer human interaction and want to speak with someone, you may not like robo-advisors. However, robo-advisors do typically charge lower fees so you’ll need to consider the trade-offs.

How much does a financial advisor cost?

The less money you dedicate to paying someone else, the more will be invested. But regardless of who helps you manage your investments, they’ll come with an extra cost.

Advisors can earn their paycheck in a few different ways:

  • Fee-only: An advisor who only earns money from the fees you pay. They don’t earn a commission and they are less likely to sell you something you don’t need.
  • Fee-based: These advisors accept commission from third-parties while also charging a fee.
  • Commission-based: Advisors who earn a portion of money when you buy a product they offer. They might be less willing to consider you and your investments, and more willing to put money in their pockets.

The specific costs can vary depending on the firm you choose and how your money is handled. For robo-advisors, fees might run 0.3% of your assets up to 2% for human advisors, according to Brandon.

“I know 2% doesn’t sound like much money, but it’s 2% of your total retirement savings, not 2% of your gains in any given period,” Brandon said. “Some years you can pay the advisor more in fees than you make in returns, and that can run into thousands of dollars.”

Many firms charge a percentage of your total investments, also known as assets under management (AUM). There might be fixed, hourly, commission or performance fees that are tacked on. The amounts can vary depending on your firm or company choice, so it’s wise to do the math before committing.

For example, if you have $100,000 in assets and a firm is charging 2% of AUM, that’s $2,000 a year. If you set up a financial plan, those fixed fees might cost another $1,000. If you’re talking to someone for a financial consultation, that could average about $200 an hour.

Before you know it, your investment cash has taken a hit. It’s hard to avoid fees completely but try to find companies that keep your costs as low as possible.

How to pick a financial advisor

Due to the lack of major oversight on what it means to be a planner or advisor, you’ll need to take the vetting into your own hands.

It’s worth your time to make sure your advisor is who they say they are. You can check a firm’s licensing by going to BrokerCheck, and you can look up a specific advisor or planner in the SEC’s Action Lookup. If someone has had court orders against them, it’ll be in the database.

If you’re choosing a local financial advisor, check your state’s securities regulator. Here, you can find and verify licenses.

It’s also perfectly normal to ask advisors for their Form ADV. This is how advisors register with the U.S. Securities and Exchange Commission (SEC) to verify their company’s practices. Companies must tell customers about the company’s offerings, the advice they give, fee schedule and conflicts of interest. They’re also required to give an update to customers every year as new employees are hired and changes occur. Feel free to look up an advisor’s Form ADV as well.

Don’t be scared to ask a potential advisor any questions you have, especially when it comes to their expertise. Ask if they are a fiduciary and have your best interest in mind. Find out how often they talk to and consult with clients. See how they earn their money and if they’ve ever had any legal trouble. Doing your homework is encouraged — your advisor could make or break your entire investment strategy.

When it’s time to hire a financial advisor

If you’re not sure if you need a financial advisor or not, ask yourself a few questions before you settle on one.

  • How much am I investing? Brandon suggests if you have $100,000 or more in investable assets, you should consider hiring a financial advisor. If you don’t have that much but still want to start investing, a robo-advisor might be the way to go.
  • What are my investing goals? Are you looking to manage your investments with a minimal amount of work? A robo-advisor might be enough. Are your investments more complex than you originally started with or it’s too much to handle? Try talking to a professional.
  • How much am I willing to pay for help? Just about every firm has fees of some kind. Robo-advisors keep costs low because there are fewer people running the show. If you want the minimum amount of management and still want to be able to speak to a person, try a hybrid company. Find a firm that offers mostly robo-advisors with the option of talking to human experts when you have questions or concerns.
  • Can I do this on my own? If you’re having trouble understanding how to invest, or would rather not learn, hiring a financial advisor to help you make the most out of your money is probably worth it.

Regardless of which type of investing help you choose, make sure you’re choosing the right one for you. Talking to a financial planner, advisor, broker or other investment specialist is a great way to make sure you’re on the right track with your money. But make sure you don’t pick one who isn’t clearly a specialist or expert in their field.

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.

Dori Zinn
Dori Zinn |

Dori Zinn is a writer at MagnifyMoney. You can email Dori here

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Investing

Should You Pay Off Debt or Save Your Money?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

You have a regular source of income, you’re paying your bills on time and you have some extra dollars left over each month. What should you do with that extra cash?

If you don’t have debt (lucky you!), then the choice is simple — save or invest as much as possible. If you have debt, however, the choice can be a bit murkier: Should you pay off your debt first or save? Here are some things to consider when asking yourself that question.

Three times that saving your money might be smarter

1. If you don’t have an emergency savings fund

Just when you’re cruising along, life can throw some unexpected and expensive curves your way. A sudden job loss, medical bills or car repairs can pop up out of the blue, and if you don’t have the funds to pay for them, you can end up seriously in the red. To cover unexpected costs, some may resort to high-interest credit cards and loans. Those kinds of moves can dig you into a financial hole that can take years to pay your way out of.

Saving up a healthy emergency fund can protect you in instances like these. How much should you save? Experts generally suggest that you should save an amount equal to between three and six months of living expenses. Depending on your individual circumstances, however, you may need more than that. (Check out this article to figure out how much to save and where to keep it.)

2. Your employer offers matching retirement contributions

If you’re fortunate enough to work for a company that offers a retirement plan with matching contributions, then consider making that method of saving a priority.

For example, if your employer offers to match your contributions dollar-for-dollar up to 6% of your salary in a 401(k) plan, then contribute at least that much, if possible. The money can then grow in a tax-free or tax-deferred 401(k) until you withdraw it in retirement — all that compound interest can really add up over the years. If you don’t contribute up to that amount, you’re leaving free money on the table.

Note, however, that If you need to withdraw these funds early (before the age of 59 and a half and before the account is five years old) there will be penalties to pay. That makes this a better tool for long-term savings rather than for the short-term or as an emergency savings fund.

3. Your debt has a very low interest rate

Debt gets a bad rap — often for good reason — but in some cases, carrying your low-interest debt and investing or saving your funds instead may be more beneficial. For example, the current fixed interest rate for direct subsidized and unsubsidized student loans is 5.05%, and the average 30-year fixed mortgage rate is about 4.3%. The stock market, on the other hand, has gone up an average of 10% a year since 1926.

Beyond comparing interest rates, however, you also need to assess how much risk you’re willing to take and how much access to your savings that you’ll need. Of course, there are no guarantees that your investments will perform well, and paying down debt comes with zero risk. Savings accounts are a less risky saving option, but the average interest rate is often less than 1 or 2%. Other options, such as individual retirement accounts (IRAs), have restrictions on how the funds can be used outside of retirement.

Four times debt repayment may be more beneficial

1. You have high-interest debt

It’s hard to get ahead of high-interest debt, because compound interest is working against you. Credit card interest rates, for example, average between 15 and 20% — an amount which adds up quickly. If you make the minimum payment, you may not even be making a dent in the principal amount owed, and you can spend years just paying interest. Calculators like this one can help you figure out just how much interest you’ll pay and how long it will take to pay off.

If you have high-interest debt, make sure you explore all the options for paying it down, including consolidating your debt and researching balance transfer cards.

2. Your debt doesn’t offer any benefits

Though your debt is costing you in interest, you might find that some loans may offer useful perks. For example, federal student loans may offer tax benefits and even loan forgiveness programs for eligible borrowers. Similarly, there are tax write-offs for mortgages and in many cases, the money you invest in a home will pay off down the line when you sell your property.

On the other hand, the debt on the credit card you maxed out to pay for that trip to Cabo comes with no benefits — just a bunch of interest. High-interest debt with no benefits should be at the top of your pay-off priority list.

3. You want to raise your credit score

While there are many factors that go into determining your credit score, the amount of debt you carry is an important component. If you plan to buy a home or secure a loan in the near future, take a look at your debt-to-income ratio (DTI), which many lenders consider before approving you for a loan. If your DTI is high, you may want to consider paying off some debt before applying for that new loan, which may result in lower interest rates for you later.

4. Your debt stresses you out

Debt can take an emotional and physical toll on people, ranging from depression to insomnia and more. When it feels like a black cloud hanging over your head and it’s affecting your life in negative ways, it may be in your best interest to prioritize paying debt off first.

Should you pay off debt or save?

Of course, saving vs. paying off debt early doesn’t have to be an either/or situation — ideally, you can do both at the same time. If, however, a choice must be made between the two, there are many factors to consider. As with most financial moves, there are no cut-and-dry rules, and the best one for you will depend on your individual circumstances.

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

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Investing

How to Make Money in Stocks

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Putting money in the market is well-worn financial advice for a reason: Investing in stocks is one of the best steps you can take toward building wealth.But how, exactly, is that wealth built? How is money earned by purchasing stock market holdings, and what can you do to maximize the gains you make from your own portfolio?

How to make money in stocks: 5 best practices

The way the stock market works — and works for you — is as simple as a high school economics class. It’s all about supply and demand, and the way those factors affect value.

Investors purchase market assets like stocks (shares of companies), which increase in value when the company does well. As the company in question makes financial progress, more investors want a piece of the action, and they’re willing to pay more for an individual share.

That means that the share you paid for has now increased in price, thanks to higher demand — which in turn means you can earn something when it comes time to sell it. (Of course, it’s also possible for stocks and other market holdings to decrease in value, which is why there’s no such thing as a risk-free investment.)

Along with the profit you can make by selling stocks, you can also earn shareholder dividends, or portions of the company’s earnings. Cash dividends are usually paid on a quarterly basis, but you might also earn dividends in the form of additional shares of stock.

Micro-mechanics of how stocks earn money aside, you likely won’t see serious growth without heeding some basic market principles and best practices. Here’s how to ensure your portfolio will do as much work for you as possible.

1. Take advantage of time

Although it’s possible to make money on the stock market in the short term, the real earning potential comes from the compound interest you earn on long-term holdings. As your assets increase in value, the total amount of money in your account grows, making room for even more capital gains. That’s how stock market earnings increase over time exponentially.

But in order to best take advantage of that exponential growth, you need to start building your portfolio as early as possible. Ideally, you’ll want to start investing as soon as you’re earning an income — perhaps by taking advantage of a company-sponsored 401(k) plan.

To see exactly how much time can affect your nest egg, let’s look at an example. Say you stashed $1,000 in your retirement account at age 20, with plans to hang up your working hat at age 70. Even if you put nothing else into the account, you’d have over $18,000 to look forward to after 50 years of growth, assuming a relatively modest 6% interest rate. But if you waited until you were 60 to make that initial deposit, you’d earn less than $800 through compound interest — which is why it’s so much harder to save for retirement if you don’t start early. Plus, all that extra cash comes at no additional effort on your part. It just requires time — so go ahead and get started!

2. Continue to invest regularly

Time is an important component of your overall portfolio growth. But even decades of compounding returns can only do so much if you don’t continue to save.

Let’s go back to our retirement example above. Only this time, instead of making a $1,000 deposit and forgetting about it, let’s say you contributed $1,000 a year — which comes out to less than $20 per week.

If you started making those annual contributions at age 20, you’d have saved about $325,000 by the time you celebrated your 70th birthday. Even if you waited until 60 to start saving, you’d wind up with about $15,000 — a far cry from the measly $1,800 you’d take out if you only made the initial deposit.

Making regular contributions doesn’t have to take much effort; you can easily automate the process through your 401(k) or brokerage account, depositing a set amount each week or pay period.

3. Set it and forget it — mostly

If you’re looking to see healthy returns on your stock market investments, just remember — you’re playing the long game.

For one thing, short-term trading lacks the tax benefits you can glean from holding onto your investments for longer. If you sell a stock before owning it for a full year, you’ll pay a higher tax rate than you would on long-term capital gains — that is, stocks you’ve held for more than a year.

While there are certain situations that do call for taking a look at your holdings, for the most part, even serious market dips reverse themselves in time. In fact, these bearish blips are regular, expected events, according to Malik S. Lee, CFP® and founder of Atlanta-based Felton & Peel Wealth Management.

So-called market corrections are healthy, he said. “It shows that the market is alive and well.” And even taking major recessions into account, the market’s performance has had an overall upward trend over the past hundred years.

4. Maintain a diverse portfolio

All investing carries risk; it’s possible for some of the companies you invest in to underperform or even fold entirely. But if you diversify your portfolio, you’ll be safeguarded against losing all of your assets when investments don’t go as planned.

By ensuring you’re invested in many different types of securities, you’ll be better prepared to weather stock market corrections. It’s unlikely that all industries and companies will suffer equally or succeed at the same level, so you can hedge your bets by buying some of everything.

5. Consider hiring professional help

Although the internet makes it relatively easy to create a well-researched DIY stock portfolio, if you’re still hesitant to put your money in the market, hiring an investment advisor can help. Even though the use of a professional can’t mitigate all risk of losses, you might feel more comfortable knowing you have an expert in your corner.

How the stock market can grow your wealth

Given the right combination of time, contribution regularity and a little bit of luck, the stock market has the potential to turn even a modest savings into an appreciable nest egg.

Ready to get started investing for yourself? Check out the following MagnifyMoney articles:

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

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