At the recent Bogleheads event, one investor had the following question:

“I’m planning to hire a financial advisor. I want somebody who can help me as I get older and possibly less able to make financial decisions and who can help my wife manage things after I’m gone. But the advisors I hear most about are people who live nowhere near me. How important is it that a financial advisor be in your local area?”

As you might imagine, the answer is, “it depends.”

How Do You Prefer to Communicate?

Firstly it depends on how comfortable you are with communicating remotely about very important topics/transactions.

For example, I personally prefer written communication rather than in-person communication for important topics. So I’ve never felt a need to meet face-to-face with the professionals with whom I work. My only communication with Austin Frakt — the coauthor of my most recent book — has been via email and phone. We’ve never met in person. And I’ve never even talked on the phone with any of the attorneys whose services I’ve used for my business. My communication with them has been nothing but email.

Alternatively, if you do feel the need for real-time, face-to-face discussions with your advisor, would you be comfortable talking via Skype? Or would you not be comfortable unless you were physically sitting in the same room as this person?

And don’t forget that if the goal for this advisory relationship is for the advisor to someday work with your spouse, your spouse’s communication preferences (rather than just your own) should be a high priority here. After your death or incapacitation, would your spouse be comfortable working with an advisor across the country, whom he/she has never met in person?

What Services Do You Need?

The question also depends to some extent on what type of services will be provided by the advisor.

For example, if all you’re looking for is portfolio management (i.e., picking an initial allocation, then rebalancing as necessary and tax-loss harvesting when advantageous), that’s a very impersonal service. Your portfolio is probably indistinguishable from the portfolios of many other investors, so the advisor will need little to no ongoing input from you about how to perform the required tasks.

In contrast, if you want your advisor to provide comprehensive financial planning services, there’s going to need to be quite a bit of ongoing communication between the two of you, so if you really don’t like doing that sort of thing remotely, a remote advisor probably isn’t a good idea.

In addition, if you’re looking for somebody with state-specific tax planning expertise, a local professional is certainly more likely to have that than an advisor many states away.

A reader writes in, asking:

“Why is there so much hoopla over the Vanguard advisory service? I thought that it was accepted wisdom that managing an index portfolio isn’t that hard. Are we all supposed to be using advisors now?”

The reason that Vanguard’s new Personal Advisor Service is a big deal is not that everybody should be using it. Plenty of people will continue to succeed with DIY portfolios; plenty of people (like me) will continue to be well served by a simple one-fund portfolio; and plenty of people will continue to find value in other advisors.

Rather, the reason Vanguard’s new service is a big deal is that it provides a clear benchmark against which other advisory services can be measured: 0.30% per year for portfolio management, an annual basic (investment-focused) financial plan from a CFP, and the ability to contact your CFP when you have questions.

For example, if we use Vanguard’s new advisory service as a point of comparison for a portfolio of actively managed mutual funds from an Edward Jones broker, we see that using Edward Jones means:

• Paying roughly 0.2%-0.4% more each year (due to higher mutual fund expense ratios),
• Paying commissions of up to 5.75% on each new investment (rather than paying no commissions at all), and
• Having an advisor with just a brokerage license rather than a CFP credential.

Vanguard’s new service is noteworthy because it makes it more obvious than ever that the traditional “full-service brokerage” model is a poor value for investors.

Alternatively, for the many independent advisors who charge an annual fee of roughly 1% of assets under management, Vanguard’s new services makes it clear that these advisors must:

1. Provide some very significant financial planning value over and above the basic financial plan that Vanguard provides with their service, and/or
2. Provide some sort of investment management expertise that is likely to earn significantly better returns than a basic portfolio of Vanguard funds.

And, together, these value-added services must be worth at least 0.7% per year. That’s certainly possible — there’s a lot of room to provide value to clients via comprehensive financial planning (i.e., tax planning, insurance planning, Social Security planning, estate planning, etc.) — but the onus is now clearly on advisors to show that their services provide sufficient value to justify the additional cost.

In short, the “big deal” about Vanguard’s Personal Advisor Service is that it provides an obvious, credible point of comparison against which other advisors can be evaluated.

A reader writes in, asking:

“What do you think about testing an advisor for a few years by giving him just a piece of the overall portfolio before turning everything over?”

I think the answer depends on what type of advisor you’re considering. But first, let’s get something important (and perhaps obvious) out of the way: Intentionally withholding information from your advisor is generally unhelpful if your goal is to get the best advice possible. As a result, anybody giving you financial advice should at least know about all of your holdings.

If we’re talking about a professional who only gives as-needed advice rather than actually managing the portfolio (e.g., an hourly financial planner), you’ll be the one in control of the portfolio the entire time. There’s no real downside to showing them everything — if you don’t like the advice you get you can always choose not to implement it.

If we’re talking about an investment manager, and the idea is to give them a portion of the portfolio to test their performance over a given period, I have to say that such an approach doesn’t make sense to me. Before giving the advisor so much as a dollar, you should have both a good understanding of their investment philosophy and a high degree of confidence in that investment philosophy. It needs to be the sort of relationship where you continue to value their services even during periods of poor performance, because there will be such periods. That is, you should choose an investment manager based on the fact that they practice an investment philosophy you believe in, not based on their performance over a particular short period.

On the other hand, I think there are some cases in which a small-scale test for an investment manager can make sense. For example, if we’re talking about an online-only investment manager (e.g., Betterment or Wealthfront), and your concern is something mundane for which you can get a clear yes/no answer right away (e.g., whether you will like their website, interface, etc)., then it can be perfectly reasonable to move a very small amount of money over to them to see what you think before transferring the whole portfolio.

If we’re talking about a commission-paid advisor, it usually makes sense to stay away completely rather than giving them even a piece of your portfolio. A commission-based pay structure creates significant conflicts of interest between the client and the advisor, which typically results in subpar advice, such as recommendations of undesirably expensive investments.

This tax season, relative to preparing my return by hand, I would say that TurboTax saved me at least $500 worth of time and stress. And I imagine it will save me a comparable amount of time and stress next year. So, come January 2015, if Amazon is selling TurboTax for $400, would it make sense for me to buy it?

Of course not (despite the fact that it would improve my “consumer surplus”). And the reason is obvious: I can buy it elsewhere at a much lower price.

When promoting their services, many financial advisors like to state that their fee is a bargain because they can improve most investors’ portfolio performance by an amount equal to or greater than their fee. For example, an advisor charging 1% per year might argue that the fee is worth paying because, without an advisor, most investors will lose at least 1% of performance per year due to picking poor funds, misguided attempts at market timing, and other mistakes that the advisor will help them to avoid.

The problem with this analysis is that it fails to ask whether the same services can be purchased elsewhere at a lower price.

Paying for Portfolio Management

The price of portfolio management (i.e., the actual running of the portfolio — purchasing funds, rebalancing, etc.) is quickly being driven downward due to competition.

At the most basic end, a Vanguard Target Retirement or LifeStrategy fund is a version of portfolio management — maintaining a diversified selection of index funds for a cost of roughly 0.10% per year (relative to the cost of a DIY index fund portfolio).

But, for various reasons, funds of funds are a poor fit for some investors (e.g., people with lots of assets in taxable accounts or people who want an allocation not available via a fund of funds). Fortunately, the selection of low-cost portfolio management providers is growing. For example:

• Wealthfront charges an annual fee of 0.25% per year,
• Betterment (for accounts of $100,000 or more) charges just 0.15% per year, and
• One new startup actually intends to offer such services completely free of charge.

In addition, as recently reported on the Bogleheads Blog, for a cost of 0.30% per year, Vanguard’s new Personal Advisor Services gives you portfolio management, plus a basic annual financial plan from a CFP, plus a designated CFP to contact when you have questions.

Paying for Advice

As far as paying for actual advice, if your needs are basic, you can again get what you need for a very modest cost. For example, Vanguard offers a basic financial plan for $250 for anybody with $50,000 or more invested with Vanguard and completely free of charge for anybody with $500,000 or more invested with them. Vanguard describes the service as providing “answers to important questions, such as:

• When can I afford to retire?
• Will I have enough saved by retirement?
• How much can I spend in retirement?
• Which investments are best for me?”

Alternatively, there are numerous independent financial planners who can skillfully provide such services for a modest one-time fee. (The Garrett Planning Network would be a good place to look, for instance.)

In short, basic portfolio management and basic portfolio-related advice are both available at a very low cost these days. Paying anything more only makes sense when you need (and are going to receive) more specialized or more thorough services (e.g., a retirement plan that incorporates not only investment decisions, but also Social Security decisions, tax planning decisions, and health insurance decisions).

I often hear from investors who are in the market for a financial advisor, but who, despite interviewing several, are struggling to find one who meets their needs. One of the most frequent causes of this difficulty is a failure to understand the difference between advisors who provide portfolio management services and advisors who provide financial planning services.

Portfolio management involves doing the actual portfolio maintenance: setting up the portfolio, rebalancing when necessary, tax loss harvesting, etc. (Just to be clear, portfolio manager is not a technical term, so these people might refer to themselves as wealth managers, money managers, investment managers, or something else entirely.)

In contrast, financial planning is about answering questions: Can you afford to retire? How much can you spend per year in retirement? Is your asset allocation appropriate? When should you claim Social Security? How can you reduce your taxes? Do you need to buy long-term care insurance? Things like that.

What confuses many people is that:

• From a regulatory perspective, both portfolio managers and financial planners are probably registered investment advisers (RIAs) or representatives thereof, and
• Either of them can have the Certified Financial Planner (CFP) designation (but neither is required to have it).

Some firms do financial planning. (Examples would include members of the Garrett Planning Network, or Allan Roth’s firm Wealth Logic.) Some firms do primarily — or exclusively — portfolio management. (Examples would include Rick Ferri’s firm Portfolio Solutions or Bill Schultheis’s firm Soundmark Wealth Management.) Many firms do both.

The story I hear over and over from readers is that, having been in the market for financial planning services, they contacted a local CFP and set up a meeting. But, once they arrived at the meeting, it became clear that the CFP was not really interested in providing one-time financial planning services. Rather, the CFP’s goal was to get the investor to sign up for ongoing portfolio management services — something in which the investor has no interest.

The key is to know ahead of time who you’re contacting — what type of business does this advisor usually do? If their website speaks a great deal about their wealth management services and doesn’t say anything about hourly consultations, that should be a good clue. If the advisor’s website doesn’t make it clear, you can check their Form ADV II. (When researching an RIA, checking this document is a good idea anyway.) Or, you can always call the advisor, telling them very explicitly what services you are and are not interested in, and asking if they would be a good fit.

In the last few weeks I’ve received emails from several readers asking about engaging me in an investment advisory (or other financial planning) capacity.

While I’m flattered that some of you trust me enough to include me on your list of advisor candidates, I am not a registered investment adviser (or representative thereof), and I am not in the business of providing investment advice (or tax advice) in exchange for compensation.

In other words, writing books, writing these articles, and corresponding with readers is the extent of my business. (Though as I’ve mentioned before, please do not hesitate to ask me questions via email. Readers’ questions serve as the inspiration for almost every article here.)

Fortunately, there are plenty of good people out there doing good advisory work at a reasonable cost.

Where to Look for an Investment Advisor

Naturally, as a DIY investor, I’ve never personally used the services of an advisor. However, one result of writing this blog is that I get the opportunity to interact with many excellent people who do advisory work.

I’ve had positive interactions with many advisors including (but not limited to) Allan Roth, Rick Ferri, and numerous people from NAPFA and the Garrett Planning Network.

So, perhaps those would be good places to start a search.

Finding the Right Type of Advisor

Regardless of where you look to find potential advisors, I think a useful step when considering a given advisor is to confirm that his/her investment philosophy matches your own philosophy prior to contacting him/her. (If you can’t find this information on the advisor’s website, you should be able to find it easily by looking at their Form ADV II.)

For example, if you’re looking for an advisor who uses a buy/hold/rebalance strategy with low-cost index funds or ETFs, you’re going to be wasting your time contacting (and giving your contact information to) an advisor who uses actively managed funds.

In addition, when looking for an advisor, it usually makes sense to narrow the field based upon what service(s) you’re looking for. For example:

• Some advisors provide as-needed advice on an hourly basis (or on a fixed fee-for-service basis),
• Some advisors provide portfolio management services (i.e., the actual running of the portfolio — buying, selling, rebalancing, etc.) on an annual-fee basis, and
• Many advisors provide both services for a combined fee.

Naturally, if you only need one service or the other, it is generally not desirable to pay for both.