Investing successfully is key to reaching your long-term goals. Your ability to invest successfully, however, is based upon a combination of your knowledge, the tools available to you, your time, your motivation and importantly, the quality of the advice that you receive.
On this topic, the quote from Clint Eastwood’s character, Dirty Harry comes to mind: “A man’s got to know his limitations.” If you have investing limitations your long-term goals may not be reached. Everyone has 5 options or approaches to investing. Which one is right for you?
1. Doing it all on your own:
You conduct the analysis, make decisions as to the correct asset allocation, determine which investments to buy, implement the buys and sells, monitor the portfolio and rebalance the portfolio based on a prudent repeatable process that is tax efficient.
2. Seek counsel from an Advisor that provides you with recommendations; either paid on an hourly basis or as part of a financial plan (and who does not sell a product).
The Advisor provides advice as to allocation and specific investments, but you implement the recommended changes to the allocation and specific investments. It is up to you to return for future advice. The Advisor does not monitor or proactively call you when a change occurs. The advice does not include the payment of commissions.
3. Advisor and you “co-manage” your investments on an ongoing basis.
The Advisor does the analysis, provides recommendations, and does the investment implementation except in the case(s) of employer retirement accounts wherein you implement specific changes. The Advisor monitors the investments and your asset allocation, reports to you periodically as to the performance of your portfolio, pro-actively contacts you if a problem arises, discusses suggested tax efficient re-balances as needed, updates your Investment Policy Statement and changes your asset allocation as your plan changes. The advice does not include the payment of commissions.
4. You turn your investment decisions over to a money manager.
The Manager invests the money according to a pre-determined plan, monitors the portfolio and investments and makes changes as needed. You are an observer to the process and the results.
5. Advice from a salesperson that earns a commission when you are sold a product.
This “non-fiduciary” advice is subject to conflict of interest between what is best for the financial services company and sales person versus what is best for you as the investor. Another issue is that if later you want to change investments, another commission can be charged. This type of approach generally occurs at Edward Jones , Merrill Lynch, Morgan Stanley MS +0.87%, and other Broker Dealers.
Which Investing Option is best for me?
There are many facets to managing your investments; opening accounts, transferring accounts or assets, buying and selling investments in each account, monitoring individual investments and your overall allocation on a periodic basis, re-balancing the asset allocation, removing poorly performing investment options and replacing with more appropriate alternatives, all in a tax-efficient manner.
Indicate your preference to each of the following statements and learn more about which approach is best suited for you where Y=Yes N=No.
|A||I have clear short, mid and long term goals for my investments||Y N|
|B||I have an investing plan (Investment Policy Statement)||Y N|
|C||I have the knowledge to manage my investments||Y N|
|D||I have the tools to manage my investments||Y N|
|E||I have the motivation to manage my investments||Y N|
|F||I have the time to manage my investments||Y N|
- If you checked yes to all six (A to F) you may be a good candidate to do it yourself.
- If you checked C, D and E as no, then Investment Option 2 or 3 may be a good option.
- If you checked no to all six (A to F) then Option 3 or 4 is a good option.
- Option 4 could be argued as a less than ideal choice if you truly believe that no one could care as much about your money as you do and that you should be part of the investment process.
- Option 5 is really not a reasonable choice since there is a conflict of interest when commissions are on the table with a salesperson.
For most people, Option 2 where an Advisor (who does not sell a product) provides advice on an hourly basis or as part of a financial plan is the better choice, or Option 3 where an Advisor and you “co-manage” your investments together on an ongoing basis.