Life Kit - Should You Pay For Financial Advice?

Episode Date: April 29, 2019

We help you understand whether you need an adviser, and if you do want one, how to find someone who will act in your best interest.Here's what to remember:- Many people don't need to pay for financial advice.- Use a "fee-only" adviser, not a "fee-based" adviser.- Consider low-cost options like robo-advisers or Vanguard.- You might need to break up with your adviser — but you can still be friends. - Two online resources can help you find an adviser: NAPFA and Kent on Money.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

What's in store for the music, TV, and film industries for 2025? We don't know, but we're making some fun, bold predictions for the new year. Listen now to the Pop Culture Happy Hour podcast from NPR. If your toilet breaks, you've got options. Maybe it's not that bad. I mean, maybe it's just that little flapper thing in the back, you know, that thing. You can learn how to fix that yourself. But maybe it's a bigger mess than that.

And you're just not that much of a do-it-yourselfer anyway. And it's just time to call a plumber. And this is kind of a good way to think about financial advice and when to pay for it. Except for one really big difference. It's not like the way that you pay the plumber is to hand over a huge bag of money, your entire life savings, and just say, hey, you know, take whatever you want because I just don't get toilets. You would never do that. That's crazy. But that is basically what millions of Americans do

with their financial advisors without even realizing it. This is your NPR Life Kit for saving and investing. And in this episode, we're going to talk about how to decide whether you need to pay for financial advice. And it's a tough decision because there are so many pitfalls. Seriously, like advisors who will steer you into investments with giant fees that'll eat up half your returns. But don't worry. We're going to help you decide what you can do by yourself. And if you do need an advisor, how to find a good one. That's right after this.

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education. A celebration of life is really no different. Planning and paying for your celebration of life in advance protects your loved ones and gives you the peace of mind you deserve. It's truly one of the best gifts you can give your family. Dignity Memorial will help you take care of every detail with professionalism and compassion. For additional information, visit DignityMemorial.com. I'm Chris Arnold, and I cover consumer protection and personal finance for NPR. And in this episode, we've got six tips to help you out when it comes to financial advice. The first, tip number one, is that you might not need to pay for any financial advice at all.

Like we said, there's pitfalls, it can be expensive, and you just might be able to do this yourself. Because at many stages of life, saving and investing is not rocket science. So I've got a checklist that if you can say yes to these boxes, then I think you're fine not having a financial planner. That's Beth Kobliner. And I'm a financial journalist and spent pretty much my whole adult life teaching financial literacy, particularly to young people. Beth also has a lot of good advice for you in our episode on how to start saving.

And now we're getting into a little more advanced stuff here with Beth. Here are the main things that she says you need to know if you're going to manage your own financial life without the help of an advisor. And there's actually a bunch of stuff here, but this is stuff that you can learn. So number one, you know what index funds and ETFs are and you understand why low fees matter and you invest in them. She says you also need to know about diversification and to take advantage of 401k or IRA retirement plans. You're paying down or have already paid down high rate debt. You're saving automatically. Ideally, you're putting away 20% of every paycheck into savings.

You don't panic. When the market dips or even plummets, you don't sell everything. You know you're in it for the long term. You have the set it, forget it model. And then there's various types of insurance, health, disability, life insurance. Basically, if you hear that checklist and you're like, I know most of that or I could figure the rest out, then that says you likely don't need to pay for financial advice. Also, you can learn a lot of this stuff on your own with our other

Life Kit episodes. And there are some really good books out there. I love Burton Malkiel's Random Walk Down Wall Street. And there are some really good books out there. I love Burton Malkiel's Random Walk Down Wall Street. And there are a bunch of others that really can help you think this through and get a grip on it yourself. I really like David Swenson's book, Unconventional Success. Definitely check that one out. And Jack Bogle, he's like the George Washington founding father of index funds. Very cool guy. He's got a book called Common Sense on Mutual Funds.

Okay, so you can do a lot of this yourself, but let's be honest. There's also a lot on that list there that you need to know to do it right. And if you don't know it, the whole DIY thing can get you into trouble. So our next big takeaway, tip number two, a good advisor can help you avoid some really big mistakes. And many of you out there told us that you learned this the hard way. We heard from a guy named An Sang who was doing pretty well investing by himself. This was 2006, 2007. The stock market was, of course, chugging along

back then. And then the market collapsed. I was like, you know, who knows how long this market's going to fall for? You know, I put all this money that I saved up over the years into the stock market, hoping that, you know, I would at least make a make a decent return. And then here here I see basically I'm losing all this money. And I just I just sort of panicked at the moment. Panicked and sold his stock at the bottom. And this is what Beth just said you're not supposed to do. And then even when the market started to recover.

My confidence was so rattled that even as the market was sort of coming back up, I was still too scared, I think, to jump back in. Okay, this is like the worst possible mistake you can make as an investor. If you panic and sell after a market crash, you can just get destroyed. And that's because stocks, look, I mean, they eventually come back up. But if you sold at the bottom, you lose a ton of money. Ahn lost half his life savings. These are very scary examples.

And there are scary times when you don't know what to do. So I think that for someone like that, having a financial advisor who talks you out of doing something that could really be harmful, that certainly is a good thing. Another good thing that an advisor can do if you're not saving any money at all or not very much is to get you set up with automatic payments into a retirement account or other savings account. So you're just doing this consistently and building up money and get that money invested in a smart, low cost way. And Beth says a good advisor will talk you out of wanting to buy individual stocks just because you read some article about hot stock picks in a magazine or heard something from a friend. People who are constantly, oh, let's buy this stock. Let's buy that stock. You know,

isn't this a great time to buy? You know, all this stuff is going up. And somebody who says, you know, they're doing the right thing for you. There was a guy in the newsroom at a local station I was at the other day, and he's like, McCormick Spices, the McCormick Spice Company. I'm buying. And I'm like, nothing against the McCormick Spice Company, but it's like, really? Like oregano? This is your big investing tip? I mean, I don't know, but like you don't know enough to buy that stock. Beth and many other experts say, look, buying individual stocks, it's just too risky. You have too many eggs in one basket. That's just one of the problems. And Beth actually over the years has changed her thinking. She used to say that most people should just learn how to manage their money and their investments themselves. But there really is so much to learn, especially at certain points in life. You know, you get married, you start having kids or when you're retiring and things get really complicated then. Advice is certainly worthwhile. Sometimes it makes sense to pay a financial

advisor if you need one, but you have to figure out, is it worth $10,000? Is it worth $50,000? If that means I'm losing out that much money over the long term. And that leads up to our next big tip. Tip number three, you don't want to pay too much for financial advice. Because we heard from so many of you out there who are just getting hammered with fees. We heard from Laura in Pittsburgh, who for years had the same financial advisor that her parents used, and she never really questioned it until recently. I was kind of like, well, huh, how much do I pay him and his firm to invest this money that we're not really doing anything with right now? It's just kind of sitting and accruing.

So basically, I found out that, you know, it was a charge of around 1.4 percent. And on top of that, Laura's advisor had her invested in mutual funds that charged more than 5 percent up front. And then there were other annual fees going forward. It's definitely ugly. That's Kent Smetters. He's an economist at the Wharton School, and he studies this whole world of financial advisors and how to cut through all the marketing and the salesmanship and find a good one. This person is, in fact, being charged a very high fee for the mutual fund. And on top of that, appears to be paying additional fees. Okay, Here is a rude awakening about this industry. When you go to a lawyer or a doctor, they have to act in your best interest. But when you go to a

financial advisor, some of them, it's more like a car salesman thing going on. Yeah. I mean, what people don't realize is that the vast majority of financial advisors, 285,000 registered advisors in the United States are in fact commission based. And Kent says that a good advisor can help you. In fact, he thinks that most people could benefit from advice, but the wrong advisor can steer you into investments with huge fees that they get a bigger commission on. And in particular, you are paying a lot of hidden fees that they get a bigger commission on. And in particular, you are paying lots of hidden fees that are packaged inside the products. And it's very hard to figure out those fees. Basically, the advisor gets paid more to stick you with high fee products that hurt you. And if that sounds kind of sleazy. That model, by the way, has been

banned in lots of countries now, like the United Kingdom, Australia, but it's very much legal here in the United States. If you remember one thing from this entire episode, this is tip number four. Kent says, if you get an advisor, you want what's called a fee-only advisor. And you ask that up front. You say, are you a fee-only advisor? You write it on the palm of your hand before you call the person on the phone. And those two words exactly, fee-only, are really important. The way I always tell people to memorize is only fee-only.

And that is, if you ask an advisor, are you fee only? And they say, yes, I'm fee based. What you do is you run because fee based, believe it or not, is not the same thing as fee only. Kent says actually there's a huge difference. Fee only is an actual legal term. It means they cannot charge these hidden commissions. It also puts the advisor under a completely different legal standard to do what's in your best interest. Kent says there's this trickery that goes on in this industry where advisors are told to tell customers that they are fee-based. So it's like this wolf in sheep's clothing thing. And it actually works. I mean, I cover this stuff as a reporter. And in talking to Kent in the studio, at one point, I goofed it up.

Even you did it, which is why the fee-based language. Oh, I said fee-based, not only. You said fee-based. Yeah, yeah. I'm telling you, that's why it's so subtle and why the fee-based movement has been so effective at kind of undermining true fiduciary advice. Because it sounds so similar. I've been infected by the marketing speak of the industry. This is super bad. I have to go take a shower. Beth Kobliner, she also likes these fee-only advisors. And she has another

question that you should always ask when you're scouting for a financial advisor. What do you think about low-cost index funds or ETFs? And frankly, even if someone doesn't understand what that question means, still ask it of your financial planner. The idea being that if a financial planner is a fan of index funds, that's an excellent sign. That's because you pay very low expenses for these index funds. And over decades, they do better than more expensive funds studies have shown. So if your advisor likes index funds, that tells you, oh, they're not just looking out for big commissions for themselves. They're looking out for my interest. And if you don't know what an index fund is and want to learn more about this,

check out our investing episode. Okay, our next big tip coming your way, tip number five. There are some good low-cost options and alternatives to a traditional advisor where you can get the advice that you want, but for a lot less money. So Beth says one thing you should definitely consider is what's called a robo-advisor. I'm a big fan of robo-advisors. I think they're kind of a good compromise. These are basically computerized financial planners that use smart algorithms to invest your money according to what your goals are. And that's because even if you find a good fee-only advisor, they might charge you 1% a year or 1.5% a year. And that definitely adds up.

That says there are a bunch of good robo-advisors, Wealthfront, Betterment. There's one called Financial Engines. And some of these were founded by Nobel laureates. So they'll invest your money in a very smart way for a much lower annual fee, like around 0.3%. But the downside is you're not going to have a human being to talk to you unless you have higher amounts, usually as much as, you know, 100,000, then you can get a financial planner. Okay. Remember the guy on saying who lost all that money when the market crashed? He figured after that experience, he probably needed some help with this whole investing thing. So he got a robo-advisor

for a bit, and that was pretty good. But he still kind of wanted to talk to a real person. So he found that the company Vanguard, which is run like a nonprofit, has what sounded like a good option where he could actually talk to human advisors for about the same super low fee. Just having someone in the loop to sort of guide me and also to sort of take my emotions out of it when it comes to investing, I thought that that was something that I wanted to do. And so I guess here we are now where I've essentially moved all my investments over to Vanguard. So what's your take, Beth, on where Aung San Suu Kyi's sort of life journey in investing here has taken him? I was going to say he's had quite the journey.

Yeah. I think he's hit investment nirvana. And I think he really has sort of landed in a place that makes a lot of sense for him and probably, you know, most people I know. And actually, Aung thinks that he's in a good place, too. He's invested in a good mix of low-cost, broad-based index funds like you're supposed to be. But he's also wondering, now that he's gotten this good advice and he's all set up and it's all basically on autopilot, maybe he could just stop paying for the advice, at least for a while. And if you find the right kind of advisor, you can just pay for financial advice at the points in your life when you really need it. Okay, so turning our invisible radio periscope on you now, do you know how much you're paying

in fees to be invested in the mutual funds and index funds that you have? And it's okay if you don't. I mean, a lot of people don't know this stuff like we were talking about. But if you don't, you just really need to call up and find that out. Kent Smetters says you should not be paying more than 0.15 percent in annual fees for your actual investments like index funds in mutual funds that are charging way more than that, and this is your number six tip, it could just be time to break up with your financial advisor. Now, a lot of people, when they get to this point, they think, oh, but come on, my financial advisor, they're like my friend. I mean, he or she might be charging a lot, but they're really nice. Yeah. As I tell people, if this advisor is making this much money in a most,

you know, underhanded way from you, they'd better be really nice. I mean, of course they're nice. Yeah. So, okay. Financial advisors have a reason to be nice, but this can also be legitimately emotional, right? Because you might've had a real long-term relationship with this person. Like Laura, whose advisor had steered her into mutual funds with these super high fees. This was like her long-term family advisor. Breaking up with him was difficult. I felt very bad because I'm pretty sure when I was much younger, eight or 10, I would actually be with my mother in like the waiting room at the investment firm and I would, you know, be doing homework or whatever and she'd be meeting with him.

My mom has said that, you know, our advisor has asked about me. It's a tangle and it makes me feel bad to even talk about it right now because I feel like they're going to be mad or sad that I'm, you know, have broken with them. You hear this a lot. They seem like a really good person. And hey, they have to make a living too. So what's the big deal? But do keep in mind, this advisor made a choice, is still making a choice to engage in a commission-based model that just simply lacks transparency. And so you can actually go to the place that you want to move your assets. In many cases, that new company will actually contact the previous company and manage the transfer of the assets.

And remember that this is money that could go towards a nice retirement or your kid's college or paying off your own student loans. Beth says, look, if you do the math on this and you see that you could be getting better advice and be invested in a good range of index funds for like 10 or 20 times cheaper. Then it's time to break up. And you have to be straightforward and say, I really appreciate your business, but I have to think of my family and what's best for me. Now it's time for me to move on.

You know, this might be a lovely man and maybe we could have brunch sometime. But right now I have to invest in the smartest way possible. Okay, we covered a lot of ground here. So to help you remember the most important tips, here come the takeaways. The first one. Many people don't need to pay for financial advice. This is not rocket science. Tip number two, a good advisor can get you to start saving more money and investing it in a low cost way and help you avoid mistakes. But tip number three, this one's

important too. The wrong advisor can stick you with huge fees that can eat half of your returns. Number four, use a fee-only advisor. The word only is super important here. By the way, we've got two good websites to go find a fee-only advisor. So you can check that out at npr.org slash life kit. Okay. Tip number five from Beth. There are good low cost options out there like robo advisors. And lastly, tip number six. It's hard to break up, but you might need to break up with your advisor and that's okay. So there you go. What you need to know about financial advice. And if this is helpful for you and you're like, yeah, okay, I'm like getting a little

more on top of it. Make sure to check out our other Life Kit podcasts at lifekit.npr.org. While you're there, subscribe to our newsletter because there's lots of stuff we can tell you about that way. We got more podcasts coming out every month on all sorts of topics. Also, check out NPR's Your Money and Your Life Facebook group. We have thousands of people in there now with questions and answers on all kinds of personal finance issues. And as always, as we wrap things up here, we're going to have an otherwise totally unrelated life tip.

This time from NPR producer Lauren Landau. If you get a bouquet and some of the flowers are still closed up, like tulips or sunflowers, and you want them to open, you can just put the cut flowers in warm water and they'll bloom faster. If you have a tip or you want to suggest a topic, we want to hear about it. Email us at lifekit at npr.org. I'm Chris Arnold. Thanks for listening. where we explain economic ideas that help you understand everyday news and everyday life. That's The Indicator from Planet Money. The Indicator is a podcast where daily economic news is about what matters to you. Workers have been feeling the sting of inflation. So as a new administration promises action on the cost of living, taxes, and home prices.

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