Article - What Does a Financial Advisor Do Anyway?

Is working with a financial advisor worth the cost? It’s a fair question.

On-demand, low/no cost financial information and resources are at everyone’s fingertips. Why pay someone for financial advice when you can get it for free?

Here are two real-life examples of conversations I have had. These are real questions from real humans.

Question #1 – The IRA

“I have an IRA question.  Google left me confused.  If we use money from our Traditional and or Roth IRA’s do we pay penalties or taxes?”

My reply

Taking money out of Traditional and Roth IRAs is complicated.  Here are some general guidelines.  You most definitely want to get specific guidance from your tax professional.

Traditional IRA distributions

If your original Traditional IRA contributions were tax deductible, the money you withdraw (whether early or not) is taxable.  Distributions from a Traditional IRA before you are older than age 59½ are taxed and get hit with a 10% penalty.  

Nondeductible IRA contributions will be tax-free, but the earnings on them will be taxed.

Taxes and penalties on early withdrawals from Traditional IRAs are brutal.  To spend one dollar from inside your IRA you nearly have to withdraw two. Yep, the taxes and penalties are that bad.  It’s pretty much the worst option particularly if others are available to you.

Distribution ordering rules for Roth IRAs

If you are younger than 59 ½ and you’ve haven’t had your Roth for at least 5 years, the money you withdraw is not a qualified distribution. Part of it might be taxable.

Money comes out of a Roth IRA in this order with these tax implications:

  1. Regular contributions — always tax- and penalty-free
  2. Conversion contributions — (meaning you converted a Traditional IRA into a Roth) come out on a first-in, first-out basis. So, conversions from the earliest year come out first.
  3. Earnings on contributions
Roth IRA earnings

Earnings inside a Roth IRA are tax-free if both following conditions are true:

  • You’ve had the Roth IRA for at least five years.
  • You’re age 59 1/2 or older when you withdraw the money.
Get professional tax advice

This is only the beginning of the conversation.  Please consult your tax professional before you make your final decision. I can make an introduction for you if you don’t have one.

Question #2 – The Inheritance

Was wondering if you can offer any quick advice on how to choose or what to look for when shopping for a Mutual Fund? Just got the money from the sale of my mom’s house, and want to try to grow like $20K

How long you can stay invested matters

How long before you need the money? Why are you investing?

I’m hoping to not touch it for a few years. My thoughts would be if it gained any value, to withdraw the gains to spend on another trip. hahaha. I already have a 401k and IRA growing, so this would just be a place to store the money for a while

If by “a few years” you mean less than five, stay away from stocks. They fluctuate too much over the short run. Parking it for a few years so you can spend it on (fill in the blank) requires something more stable. Good choices would be a a short-term bond fund (maturities of less than 5 years) or a certificate of deposit from your bank or credit union. You will earn less, but you also won’t have to worry about wide swings in value.

Let’s say that I don’t want to touch it for at least 5 years… I’ve seen wide swings in my IRA, but overall for the past 5 years, It has made money…

How to think about owning stocks

If you can stay invested for 5+ years then owning the best companies of America and the rest of the World (aka stocks) can make sense. The question is how to go about it?  Since no one knows which stocks will perform the best over any given time short time period (all stocks go up in time, just not at the same time) it is usually best to own a very broad array of them. 

Look for, perhaps, three funds. One that invests broadly in U.S. companies. Then add one that invests broadly internationally. Last, find one that focuses on small companies. Divide the money between them 40%, 40%, 20%. 

Look into Vanguard and other low cost offerings. Find funds that don’t charge you anything upfront. Pay attention to on-going management fees. Lower is better. Most mutual funds and brokerage companies offer reasonable low cost online access and service, too.

Rebalance periodically

As time goes by, say, once a year, return your fund balances back to the original 40-40-20 mix. This will force you to take money from the ones that have gone up (sell high) and move it into the ones that have stood still or declined (buy low). It’s a simple technique that adds significant value over time.

great advice. I really appreciate it…. I was going to ask about those fees and what to look out for. I think I’m gonna follow this plan because the last thing I want is to look back in 5-10 years and see that all of my mom’s money is gone.

Do it and you will fully capture the returns the markets will give you for simply participating intelligently. And don’t get distracted by the news. It’s investment pornography! 

Second opinions matter, too

This is some of what a Financial Advisor does. Were you expecting a prediction about “the market,” a hot stock tip, or an annuity pitch? That’s not real financial advice. But it’s often what passes for it.

Still wondering if it’s worth it? Here’s what Vanguard thinks.

Their article is technical but the conclusion is that working with a real financial advisor will provide 3% in added value over the advisor’s fee. Behavioral coaching alone adds 1.5%. So, go it alone if you must. But be aware that there is a price to pay if you do.

Are you now wondering about your financial plan? Click here to a schedule a call for a Second Opinion. No cost. No obligation. No hustle.

There are still some things, like planning, perspective, and accountability, you just can’t Google.