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Is Your Advisor Helping or Hurting Your Retirement Strategy?

By U.S. News & World Report

A financial advisor can help with guiding investment decisions and shaping your retirement plan, but that advice doesn’t come cheap.

On average, investors paid between 0.59 percent and 1.18 percent in advisory fees in 2017, according to AdvisoryHQ. Investors with $50,000 or less to invest paid the highest percentage in fees for professional investment advice.

A Personal Capital report found that 61 percent of Americans are in the dark about just how much they pay in advisor fees. Just 46 percent of those polled agreed that their advisors only recommend what is in their best interest.

The question of fees — and whether they’re justified by portfolio returns — is a central one for investors. Fees can significantly erode earnings over time, affecting your ability to accumulate retirement wealth.

[See: 7 Things That Can Derail Your Retirement Investing.]

Let’s say you have two $100,000 investments, and both earn an 8 percent annual return before fees. The first investment has a fee of 0.25 percent and the second has a fee of 1 percent. “The difference may seem slight, but over a 15-year period, the first investment grows to $306,379, while the second grows to $275,903,” a gap of more than $30,000 because of higher fees, says David Peterson, managing director at United Capital in Denver.

If you’re working with an advisor or considering doing so, fees should be a central part of your retirement planning discussions.

Know which fees are necessary. Fees are part of the investment process, says Megan Gorman, managing partner of Chequers Financial Management in San Francisco, but investors should question their purpose. “It’s important to understand where paying higher fees is necessary to get access to the right underlying investment.”

In the large-cap asset class, for example, a simple index fund may work best. By comparison, paying a higher fee to access emerging markets might make sense because this asset class is more volatile. In that instance, indexing “might create hidden unnecessary risks in your portfolio,” Gorman says.

Setting expectations early on can give you a better understanding of the service you should expect, and how that may translate to investment performance and risk.

In addition to the advisor fee, Peterson says investors must consider the cost of the underlying asset, the transaction costs and custodial fees. These last two tend to be more transparent, while the cost of individual investments may be less so. You should also know whether you’re paying for a fee-only or fee-based advisor.

Fee-only advisors may charge an hourly rate, a retainer fee or, more commonly, a percentage of the assets under management. Fee-based advisors may offer similar fee structures but receive commissions for the products they sell.

If you’re confused about which type of advisor you’re working with, or the advisor can’t tell you what the fees you’re paying are for, Oliver Lee, owner of The Strategic Planning Group in Lake Orion, Michigan, has this piece of advice: “Find a new advisor.”

Weigh the trade-off between cost and performance. Robo advisors have emerged as an alternative to the traditional advisor model. Part of their appeal lies in their cost structure. A NerdWallet comparison found that advisory fees ranged from 0.25 percent to 0.40 percent among the top robo-advisory firms. Two advisors — Schwab Intelligent Portfolios and WiseBanyan — charge no advisory management fees at all.

[See: 9 Things to Know About Robo Advisors.]

That may appeal more to cost-conscious investors, but eschewing a traditional advisor may have intangible costs for an investment strategy. “At the end of the day, a robo advisor is just a computer, and the computer doesn’t understand when changes happen in your life,” says Christy Smith, founder and investment advisor representative at Presley Wealth Management in Denham Springs, Louisiana.

You may benefit more from having someone who’s able to prioritize your needs at various life stages, even if that means paying a higher fee for financial advice.

Kyle Attarian, wealth manager at Plancorp in St. Louis, says robo advisors fall short of addressing the emotional side of investing. “Money is emotional and a strong driver of human behavior, and if not carefully managed, it can lead to bad behavior.” Robo and human advisors attempt to manage behavior, but the former isn’t capable of recognizing how emotions motivate decisions.

During times of emotional (and market) chaos, Attarian says it’s easier to deviate from a long-term plan when you’re answering to a robot, as opposed to another human being who is there to hold you accountable and guide you. Whether you choose a robo advisor to manage costs or a human advisor, your level of discipline matters. “The more emotion that’s allowed to seep into the investing equation, the worse the performance will be, all else being equal,” he says.

Lee says if you turn to a robo advisor to generate higher returns with fewer fees, look behind the scenes. “Do you really know what they’re doing, or what they’re planning to do with your hard-earned money?” Those are questions you need answers to before banking your retirement on a robo advisor.

Consider a fiduciary. Financial advisors are not created equal, and if you have concerns about cost, a fiduciary may be the solution. These advisors are required to act ethically on behalf of their clients, and that includes clearly disclosing fees.

But don’t take their fee explanation at face value. “Many advisors consider themselves fiduciaries, so it’s important to perform due diligence when it comes to fees,” Gorman says. When meeting with a fiduciary, ask about the underlying fees related to the types of investments they typically recommend. Be clear about which fees go to the advisor, versus any transaction or fund fees.

Peterson says investors may not understand that brokers who are not fiduciaries owe their loyalty to the company they represent first and their clients second. A broker may offer an investment with the claim of no fees but may be compensated by the company selling the product. There may be no upfront cost for the broker’s advice, but the investor’s portfolio may pay a price if the investment isn’t a good match for the person’s retirement strategy.

[See: 8 Things to Consider When Choosing an Online Broker.]

As you evaluate advisors and their costs, Smith says to consider whether they provide other services that don’t carry additional charges. When working with a financial planner, look for one that offers a holistic approach that includes your Social Security benefits, estate planning, Medicare benefits and long-term care to “create a plan that’s in your best interest, while investing your money at the lowest-possible cost to you.”

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Is Your Advisor Helping or Hurting Your Retirement Strategy? originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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