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WalletPrep worksheet · Investing

How do you choose a financial adviser?

Name ____________________ Date __________

Key ideas

  1. Ask how they get paid, in dollars. The SEC suggests asking how much of $10,000 would go to fees and how much would be invested for you.
  2. Investment advisers owe you a fiduciary duty. Registered investment advisers must act in your best interest for the whole relationship. Brokers must do so when recommending something.
  3. Background checks are free and take minutes. Search the person and firm on Investor.gov or FINRA BrokerCheck for registration, past complaints and disciplinary actions.

Vocabulary

Fiduciary
Someone legally required to act in your best interest, put your interests ahead of their own and disclose any conflicts.
Assets
Things you own that have money value, like cash, savings, retirement accounts, investments, a home or a car.
401(k)
A retirement savings plan offered through an employer. Money comes straight from your paycheck, often with an employer match.
Rebalancing
Moving your investments back to the mix of stocks, bonds and cash you chose, after market moves have pushed it off target.
Mutual fund
A fund that pools money from many investors to buy stocks, bonds or other assets, priced once a day after the market closes.

Work it out

Chris has $50,000 to invest and is offered management for 1% of assets a year. Assume a 7% yearly return before fees, so the fee leaves about 6%. Returns vary and can be negative.

  1. Assumed return before fees
  2. First-year fee (1% of $50,000)
  3. After 20 years at 7%
  4. After 20 years at 6%
  5. Cost of the 1% fee

Check yourself

  1. An adviser charges 0.8% a year on $75,000. What is the fee in the first year?

    • A. $80
    • B. $600
    • C. $800
    • D. $6,000

  2. Where can you check an adviser's or broker's disciplinary history for free?

    • A. Their own website
    • B. A social media review site
    • C. Investor.gov and FINRA BrokerCheck
    • D. Your bank statement

  3. Which describes the fiduciary duty of a registered investment adviser?

    • A. It applies to the whole advisory relationship
    • B. It applies only when selling insurance
    • C. It promises you will not lose money
    • D. It only applies to accounts over $1 million

Your turn

Write down the one money question you most want help with. If you have an adviser already, look them up on Investor.gov and BrokerCheck, then find your total yearly fees in dollars on your last statement or ask for them.

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Answer key

How do you choose a financial adviser?

Work it out

  1. Assumed return before fees7%
  2. First-year fee (1% of $50,000)$500
  3. After 20 years at 7%$201,937
  4. After 20 years at 6%− $165,510
  5. Cost of the 1% fee= $36,427
  1. The first year, the fee is $50,000 × 1% = $500. It is charged again every year on a bigger balance.
  2. With no fee, $50,000 grows to about $201,937 in 20 years at 7%. At 6% it grows to about $165,510.
  3. The difference is $201,937 − $165,510 = $36,427. That is what the fee costs, so the advice should be worth at least that much.

Check yourself

  1. B. $600 $75,000 × 0.8% = $600. The fee repeats every year on whatever the balance grows to.
  2. C. Investor.gov and FINRA BrokerCheck Investor.gov's professional search and FINRA BrokerCheck show registration, complaints and disciplinary actions using regulator records.
  3. A. It applies to the whole advisory relationship An investment adviser's fiduciary duty covers the entire relationship. It does not promise returns or protect against losses.