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Where to Find Financial Advice? Probably Not Your Brokerage Firm

Jason writes in to ask:

I met with an investment counselor at my bank. I liked him personally, and he was very respectful of my investment goals.

He came up with a portfolio of five different American Funds offerings–a mix of domestic stock, international stock, and bond funds. The downside is that American Funds requires me to pay an up-front fee equal to 3.5% of my investment.

I’ve read about the advantages of index funds, which I can purchase cheaply through an online brokerage. I am leaning toward that type of strategy, but can online discount brokerages advise me on how to use index funds to put together a portfolio? Or will I be on my own? Or is there somewhere else I should seek advice?

Avoiding Commission-Paid Brokers

American Funds are definitely not the worst thing a person can invest in. That said, I’d generally recommend staying away from sales-loaded mutual funds and the brokers who sell them.

For example, based on Jason’s statement that he’d be paying a 3.5% sales load, it appears that we’re talking about an amount between $100,000 and $250,000. That means that, at a minimum, he’s looking at an up-front cost of $3,500 for this advice. You can get a good financial plan for significantly less than $3,500.

Separating the Advice from the Transaction

Jason raises a good point about discount brokerage firms: They generally don’t offer financial advisor services.

But that’s fine. In fact, even if your brokerage firm does offer such services, I’d generally steer clear. As I’ve mentioned before, brokerage firms have a vested interest in getting you to do what’s profitable for them, rather than what’s profitable for you.

As such, I think it’s usually a good idea to invest with one company (a discount brokerage firm of your choosing) and get your advice from a different company. In my opinion, hourly-fee advice from an independent advisor is the least-biased available.

Exception: Vanguard CFPs

There is one noteworthy exception to my suggestion to avoid advice from your brokerage firm: Vanguard. Vanguard has CFPs on staff who can help with managing your portfolio.

There are two reasons I’d be far more willing to accept investment suggestions from Vanguard than from any other brokerage firm or fund company:

  1. As we’ve discussed before, Vanguard is (indirectly) owned by clients, so there’s not much of an incentive for them to recommend anything other than what they believe is best for you.
  2. Their funds are always among the cheapest in each category (especially if you request that the CFP stick to index funds).

Also, the price is quite affordable:

  • For people with accounts of $500,000 or more, the service is free.
  • For people with accounts between $50,000 and $500,000, it costs a flat $250.

For people with less than $50,000, it costs $1,000, though in most cases a portfolio of less than $50,000 shouldn’t be terribly difficult to manage on one’s own.

My understanding is that it’s a relatively basic plan–not as comprehensive as you could get by sitting down with an independent CFP, for instance. Though at $250, that’s still a bargain. At $0, well, that’s even better. 🙂

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  1. Kathryn C says

    Hi there, I did the $250 vanguard plan a bit ago to see if it was worth mentioning to my friends (they’re all asking me if they need a financial advisor, we’re in our early/mid 30’s)….and I was under impressed by the service.

    To be fair, I work in finance so I knew what questions to ask. But only after I asked specific questions did I get answers. Meaning, there was some information that would have been good to know ( like buying on the distribution) that I asked about (instead of them telling me about this) when we were discussing buying mutual funds. That’s a big deal to me, and if someone hadn’t thought(or didn’t know) to ask about that, they might get hosed on taxes. Anyway…..I was underwhelmed. But, if someone has no financial back ground whatsoever, it might be an ok way to go. Or, they could just read Boglheads’ Guide To Investing, and get the same info for a lot less money (but I understand people like to “talk” to people, which makes sense)!

  2. Thanks for sharing your experience Kathryn.

    That seems to match up with what I’ve heard from others: It’s a very basic service–helpful if that’s what you’re looking for, but definitely not the same as what you would get (at an admittedly higher price) from an ongoing relationship with an independent CFP.

  3. Great blog post. Thanks for sharing (and thanks for sharing your personal story @Kathryn)!

  4. Kathryn: Have you seen this article from The Finance Buff?

  5. Kathryn C says

    Chuck, I haven’t seen that but I will take a look this week, looks very interesting. thank you for the link! I just recently started reading TFB so missed that.

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