A couple of weeks ago, someone reached out to me, and I feel it’s important I share the story with you because, as it turned out, several people are facing this challenge. Also, I have seen the same question pop up in many forums where personal finance is being discussed.
So, this young man said to me he needs advice on what to do with his money. He earns well around $60,000 to $90,000 annually, and he has been saving quite well and now has cash buildup running into six figures in his saving account. However, he is only getting 0.06% interest per year for all his savings.
He wanted to know how to get started on building a future by adequately investing in different assets. Also, he asked if he should delegate all the funds to an investment company or learn to do things by himself.
We had several interesting discussions, and I will share some of them with you here, hoping you will find them helpful or share them with someone who might.
Let’s face it, earning $60,000 to $90,000 annually is no small money in this current economy and what is happening globally, and if you are now asking to know how to invest and grow your money, that in itself is an achievement.
That said, a proper investment plan can help your turn your savings into a lot more. Having your fund in a suitable investment vehicle is essential.
Its Starts With Your Financial Literacy
Before we even got into any form of technical talks about investment and returns, the first thing I did was to gauge his financial literacy.
Like I said in a previous post, which you can find here, it is not about maths; it is more about understanding how your money works. How do you make money?
You need an understanding of what causes your money to increase or reduce. Can you control those things that reduce them? The answers to this question will help you a lot going forward.
To be financially literate means understanding money and having the confidence to economically and effectively manage, save, and invest money for you and your loved ones. You can only find this type of down-to-earth approach here on Personal Finance Gold.
What is Your Risk Tolerance Level?
The next thing I need to gauge was his risk tolerance. I have always advocated that people should not hurry to dive into an investment vehicle because they do not fully understand how their money will end.
From my experience, I have seen how the anxiety has crushed the confidence of several investors over the years. All because they didn’t take the time to check if the investment they were putting in their money was the right one for them.
Risk tolerance, a lot of the time, works with age. The older you get, the less risk you will be open to taking. On the other hand, younger people are more willing to taking on more risks for higher returns.
While checking the young man’s financial and risk-tolerance levels, I realized he falls into the category of the very busy people who are currently serving our nation at this critical time.
So, as my way of saying, “thank you for your service,” I offered him double advice for one.
- Let other professionals manage your funds.
- DIY investment strategy
Let’s dive into it.
I Need Someone To Manage My Money – Investment Managers, Advisors, and Fiduciaries
This strategy applies to busy people who want to grow their money and people with very low-risk tolerance.
I figured that many people here have funds saved away in accounts that are not returning any interest to them because they don’t have what it takes to turn the money over on their own. So if you find yourself in this category, there’s hope.
For easier understanding, I will break this post into two parts. The first part will focus on delegating the management of your funds to someone else, mostly a professional. While the second part will focus on DIY (Do It Yourself).
When you start earning six figures or have it saved up, then you certainly need investment management.
Investment management is simply the process of building a portfolio of bonds, stocks, and other investments based on your goals. You can employ the service of an investment manager or manage your affairs yourself. Our focus here is hiring the services of an individual or a firm.
It is a false assumption to think you need to be super rich before you can afford the service of an investment manager. It’s all about making the most of your money.
No matter the size of your portfolio and how diversified you think it is, you need to ensure your money is growing. That’s what an investment manager can do for you.
Investment Management Defined
It’s the creation and overall care of an investment portfolio, which includes suggesting strategies, allocating, buying and selling, and managing portfolios. Services that fall under investment management are assets management, portfolio management, and other services rendered by experts to provide general management of client’s funds.
Investment management ensures that the client portfolio aligns with the goals, risk tolerance, and financial objectives. It goes beyond just managing a specific asset.
Duties of an Investment Manager
So, an investment manager is a person or company who manages an investment portfolio on their client’s behalf.
They’re also responsible for drafting strategies that achieve the client’s goals; they, in turn, use these strategies to divide the clients’ portfolio into several investments like bonds, stocks, and other investment vehicles.
The manager is responsible for monitoring the performance of the clients’ portfolios.
Depending on the contract, some investment managers can serve as your financial planners, offering suggestions and advice on matters like cash-flow management, taxes, estate management, and insurance.
When Do You Need an Investment Manager?
- When you are unsure about your investment decisions or when you need a professional opinion.
- When you need a professional to manage your portfolio, you are too busy or lack the knowledge to do it.
- When you are dealing with issues like inheritances, tax strategies, legacy planning, or retirement income.
- When you need advice on debt management, insurance, or cash-flow planning.
- When you are expecting or have been through a significant event like getting married, having a child, or any significant change in your income.
The service of an investment service manager comes at a fee. However, his payment is not particularly linked to the performance of the portfolio he is managing. So, he gets the same agreed fee when he makes a lot of money for the client.
The same applies when his efforts yield nothing. However, if your investment manager agrees to work on commission, that will be a percentage of the net income for a given period.
Arrangements based on commission tend to influence the investment manager because they will likely look for themselves too in their decisions.
The word “fiduciary” used to be associated with managing “Trust” for the elderly, an underage or someone declared by the court as incapable of managing their affairs. However, it has gradually become a part of the financial industry. So, let’s talk about it.
A fiduciary must put the interest of their client above their personal gains. They are bound by ethical duty to advise you on the best investments. The role of a fiduciary is similar to what the skydiving instructor does for you if you have ever gone skydiving.
The instructor must have your interest at heart and ensure your parachute opens at the right time, and guide you to land safely no matter how scared you might be.
A fiduciary is an individual or a firm who acts in the best interest of a person or beneficiary. Financial fiduciary advisors can only invest in securities that are in the interest of their clients.
Fiduciaries operate under a bond of trust with their clients and must always avoid a conflict of interest. So it’s the interest of the client first and at all times.
When your financial advisor does not have a fiduciary duty to you, they may recommend products or investments that will benefit them in the form of higher commission, which could cost you more.
Please note that not all fiduciaries are financial advisors. The role of a fiduciary exist in areas where a higher level of trust is required.
For example, Board members may have a fiduciary duty to their companies, trustees have a fiduciary duty to their beneficiaries, while retirement administrators owe a duty to their company’s employees.
Here’s how the experts put it;
“Anyone can call themselves a fiduciary.” “The legal obligations associated with being a fiduciary are based upon trust law; the professional acts as a ‘trustee,’ and the client can be thought of as the ‘trustor.” says Blaine Aikins, executive Chairman and fiduciary expert at Fi360. A fiduciary education and training company.
“Being a fiduciary is all about being legally accountable to the client.” “A fiduciary is someone (individual or institution) that has the legal responsibility and authority to act in the best interest of another.” “From a practical standpoint, almost anyone can act as a fiduciary.” “There are restrictions and requirements actually to call oneself a fiduciary,” These restrictions can be incredibly nuanced” because “the scope of a fiduciary role can be holistic or quite narrow,” says Billy Lanter, a fiduciary investment advisor at Unified Trust.
6 Types of Fiduciaries
1. Fee-only Fiduciaries
These types of advisors only receive compensation from their clients. You are not expected to pay them any other form of compensation or commission.
They will typically charge you a flat fee, a percentage of the asset under their management, or an hourly rate. Remember that not all “fee-only” financial advisors are fiduciaries, and not all fee-only fiduciaries are advisors.
2. Certified Financial Planner Fiduciaries (CFPs)
They provide financial planning or engage in the elements of financial planning for their clients. A CFP is held by a standard that includes the duty to loyalty, care, and they follow your directions on the best decision for you.
Also, note that being a CFP does make that person a fiduciary, especially if they are actively providing or engaged in financial planning to the client.
3. Registered Investment Advisor Fiduciaries
The registered investment advisor fiduciaries carry out their duty to their clients under the Securities and Exchange Commission’s Investment Act of 1940.
The act requires advisors to be clear and transparent with clients about their activities like investments, charges and disclose all potential conflicts of interest resulting from their advice.
4. Retirement Advisor Fiduciaries
According to the Department of Labor, a DOL fiduciary is expected to offer advice on retirement investments like 401(k) plan participants and individual retirement accounts. As long as the advice being offered is tied to retirement, the DOL expects the expert to act as a fiduciary.
5. Voluntary Fiduciaries
A voluntary fiduciary is a financial advisor not registered with SEC or DOL but has pledged to adhere to the fiduciary codes. These individuals take the fiduciary oath as part of their professional designation or certification.
6. Robo-advisor Fiduciary
Robo advisors are AIs (Artificial Intelligence). They use computer algorithms to generate data and manage your investment portfolio based on preferences like risk tolerance and broad experience. Interestingly, several Robo-advisors are registered with the Securities and Exchange Commission, and they perform fiduciary duties to their clients.
However, Robo-advisors have come under stiff criticism for lacking the capacity to understand the client’s needs fully.
Their critics believe this limitation can hinder their effectiveness in planning the client’s finances like debt management; hence, they concluded that Robo-advisors should not be regarded as fiduciaries.
Payment Structure for Fiduciaries
Before you sign up a fiduciary, a financial advisor, or an investment manager, ensure you understand all their fees. Below are the typical types of payment structures.
- Fee-Only: this type of expert charges flat rates, hourly rates, or a percentage of the assets they are managing for you. CFPs mostly prefer Fee-only.
- Fee-Based: this type of payment structure is often mixed. For example, you will be charged a base fee and possibly commission on financial products and investment trades.
- Commissioned Based: under this payment structure, the advisor gets commissions based on the financial product they sell to you.
Types of Financial Advisors
Financial advisors go by several names. Take the time to looks carefully and ensure you are engaging the right advisor that matches your need.
Here are the common types of financial advisors you will find out there;
- Broker-Dealers and Brokers
- Certified Financial Planner (CFP)
- Investment Advisor
- Financial Consultant
- Financial Coach
- Wealth Advisors
- Portfolio, Investment, and Asset Managers
As we were rounding up the second session with this young man that asked me all these questions, I could tell he had something he wanted to ask or get off his chest, but he was reluctant because it was a long and comprehensive session, and he could tell I was running low on energy. I managed to nod to give him the “go ahead and ask” sign.
He asked if it was alright for his family member, who had the experience, knowledge, and skill to manage his money. Immediately he dropped the question; I found renewed energy to talk a little longer because I understood the significance of that question.
Why family members should not be allowed to manage your money
When something happens repeatedly, it becomes a trend. That’s one of the simple descriptions to explain family members and money management.
I can write a 75,000-word book about how one family member has failed in successfully managing the other money. There were no consequences because no one wants to be responsible for taking their relations to court over money.
It’s even worse when the lawyer who is supposed to be fighting your course is the one advising you to settle the matter amicable since it’s a “family thing.”
On paper, it should really be a great idea to have relatives manage your money, especially if you believe they should be acting in your best interest. However, experience has shown that family, money, and management are three words that rarely work successfully together.
Brokerage firms are known to take advantage of staff and their family members. Once they start working at a new firm, these young people are task to contact their family members to attract assets to the firm and help boost their books. When such a family member visits you with such a request, it will be tough to say no because you want to support them in doing well at their jobs.
What usually happens is that you will later discover that this relative who sold the financial product was ill-informed or might have “over-promised” on what they can deliver.
When you finally realized it, it would have been too late, you would have lost money, and you can’t sue for damages only because the person responsible “is family.” Meanwhile, it would have been a different scenario if the person had been a typical expert like the earlier names.
They would not only be responsible for informing you about everything you need to know; it will be their duty to ensure your portfolio is safe. If you suspect any foul play, you can sue for damages.
Let’s face it; your family members know you will be reluctant to hold them accountable. They know there’s a limit to how far you can push. In fact, they know you can’t sue them.
They are well aware that before things get that bad, other family members would have intervened. I’m not saying the people in your family are bad, neither am I making a blanket statement. There are exceptions, but there are more terrible experiences than great ones.
So my recommendation, keep your family away from the management of your money. Please use paid professionals if you must delegate.
How Much Does it Cost to Engage a Financial Advisor?
Financial advisors charge based on the size of the asset they are managing for you. Their fees can range from 0.25% to 1% per annum. Some prefer to charge flat rates while other work with annual fees instead.
Advisors who charge a flat fee can operate within a range of $2,000 and $7,500 annually, while advisors who charge a percentage of the size of your asset or portfolio charge between 0.25% and 1% per year.
For example, if you engage a financial advisor to manage your $100,000 portfolio, he charges 0.50% a year. So his fees will come to $500.
See the table below for further clarification;
|Fee Types||Cost Implication|
|Hourly Fee||$200 to $400|
|Per Plan Fee||$1,000 to $3,000|
|Retainer Fee||$2,000 to $7,500|
|Assets Under Management (AUM)||Between 0.25% and 0.50% for Robo-advisor and 1% for an in-person financial advisor|
Here’s an essential piece of information I think you should ponder on, those super-rich guys that you see and read about all the time. Do you think they sit by their portfolio to monitor everything dime that comes in or goes out? No, they don’t!
They have only mastered the art of employing the right people to manage their assets. You can do the same too.
Delegating your money management to an expert is smart when you don’t have time to do it yourself or have no clue how to go about it. It can even be because your risk tolerance is significantly low, and you need to build it gradually.
You only need to take time to ensure you choose the right expert for the particular service you need them to handle.
When it comes to family and having them manage your finances, I stand by my recommendation earlier. If not for anything but the peace of the family.
This is a 2-part writing piece, please visit my 2nd part about how to get help managing your money.