Getting good, but cheap, financial advice

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By Sheyna Steiner, Bankrate.com

Investing advice is as common as grass. It’s on TV, it’s on the Internet. It’s in newspapers, magazines and plenty of books, for dummies and nondummies alike.

Even with the massive proliferation of information, financial expertise eludes most.

In fact, basic financial planning eludes many people. A little targeted advice could cut through the confusion.

“But wait,” you may be saying, “I can’t afford to pay for advice; I’m not a millionaire.” You don’t need to be. Reliable and affordable financial advice is available for everyone on the socioeconomic scale.

401(k) plan advice

One option might be as close as your home away from home: work. Many employers who sponsor a retirement plan offer free or discounted advice from the plan provider. Half of employers offer third-party investment advice, and another 9 percent plan to offer it, according to “Trends and experience in 401(k) plans,” a 2009 study from Hewitt Associates.

Advice options for plan participants are somewhat limited due to laws governing employee retirement accounts and employers’ liability concerns.

A recent law, the Pension Protection Act of 2006, “gave a little bit more breathing room for employers to offer these programs without liability concerns,” says Leonard Sanicola, benefits practice leader at WorldatWork.org, a human resources professional association.

According to the Department of Labor, as a result of Pension Protection Act of 2006, the advice can be either:

  • From a computer program.
  • Directly from an adviser as long as the adviser is compensated the same amount no matter what the recommendation or how the plan participants invest.

The advice can be invaluable for plan participants. A recent survey has found that employees who do take advantage of the advice offered through their employer’s plan, and then use it, do better than their unadvised peers.

The survey, by Charles Schwab, found that nearly three-quarters (74 percent) of Schwab’s plan sponsor clients make advice available to plan participants. Fewer than 1 out of 10 people make use of that advice, however.

When plan participants do talk to advisers offered by their employers, it has a positive impact. The percentage of income deferred increases by an average of 5.42 percent to about 10 percent of their pay.

“It makes people save more. They have better diversification and better rates of return. And a big thing — it helps people stay the course,” says Dean Kohmann, vice president of 401(k) services at Charles Schwab.

Most plan participants (92 percent) stuck to their plan through the market turmoil in 2008 and 2009.

If the service is offered with your retirement account, you should strongly consider taking advantage of it. It will probably be a lot better than doing nothing.

Talk to a paid professional

If you don’t have access to cheap advice at work, you can always hire help. And you don’t have to pay through the nose.

Financial advisers can be paid in a variety of ways. They may take a percentage of assets that they manage — typically 1 percent. That’s a very high-end option. They can also be paid a retainer for their services, which is also marketed to the high-net-worth set.

Paying an annual retainer fee allows investors with complex tax and investment circumstances to receive ongoing advice throughout the year. The fee may cover several meetings over the course of a year as well as the benefit of calling or visiting anytime on an as-needed basis.

Fee-only planners can also charge on an hourly basis — on average, about $150 to $300 per hour, says Ben Lewis, communications and marketing manager at the National Association of Personal Finance Advisors.

Some advisers are paid by fees but also take commissions, while others are commission-only.

The problem with commissions: An adviser has an incentive to invest assets in funds that pay better commissions.

There are two schools of thought on taking advice from anyone with a possible conflict of interest.

The first school of thought: Don’t do it.

The second school of thought reasons that a competent and well-intentioned financial adviser who also happens to get paid commissions can be as good as a fee-only adviser.

“There are a lot of professionals who are very, very good at their jobs and are paid through commissions,” says Kenn Beam Tacchino, director of the New York Life Center for Retirement Income at the American College.

Because they are paid by selling products, your out-of-pocket cost drops. That’s because the adviser takes a percentage of your investment off the top rather than sending you a bill for services. Or, in some cases, the adviser may be paid fees by the mutual fund company. But you do need to feel confident taking their recommendations.

Tacchino says that advisers paid only on commission “are not going to do a thorough fee plan where it will cost thousands of dollars and time and effort, but many are conscientious and do a needs analysis.”

Using this approach, they may be able to match you up with products to meet your needs.

The website of the Society of Financial Service Professionals provides a short list of commission-based, credentialed, financial planners in your geographic area.

Yuval Bar-Or, Ph.D., and author of “Play to Prosper: The Small Investor’s Survival Guide,” subscribes to the first school of thought.

It’s very important to get “someone with the least amount of conflicts of interest as possible,” he says.

He recommends investors go to NAPFA.org, the National Association of Personal Financial Advisors, to find a fee-only adviser.

No matter how the adviser is paid, some professional credentials should appear after their name. Though there are many designations, the gold standard is the Certified Financial Planner, or CFP, designation.

The Certified Financial Planner Board of Standards provides a questionnaire investors can use to screen for prospective planners. Bankrate’s work sheet also lists important questions. Interview several planners before settling on one. An initial meeting should be free in most cases.

“It’s an investment for a person to go and see a qualified CFP because you learn a lot in the process and become self-sufficient thereafter,” says Bar-Or.

Investing isn’t rocket science, but some good advice at the outset can mean the difference between soaring returns and a painful crash and burn.

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