This article is about finding advice on financial matters. It's organized around three topics:
- Who Needs an Adviser? When is automated advice best? Where can you get it?
- Advising Yourself. What good, free apps and tools can you use as your own adviser?
- Paying for Advice. How can you find a qualified, low-cost adviser, if you need one?
Who Needs an Adviser?
It can be comforting to hear advice from a person who has relevant experience and deep knowledge. Somehow, it goes against the grain to trust an automated system, a robo-adviser, over a real person who seems reassuring and wise. Yet, in certain areas, any human adviser these days is probably dispensing ideas and services that were generated by a system or algorithm the adviser uses. In these areas, so much research has been done, by so many intelligent people, that the best results have been automated and are readily available.
Sensible Automation
In particular, three types of financial assistance permit automation that is probably better, and surely less expensive, than advice from a human adviser:
To be sure, a human adviser can be very helpful in other circumstances that are unique to you. Examples might include planning for a major purchase, developing your retirement budget, writing a plan to reduce your debts and increase your savings, picking a sensible set of insurance policies, determining whether you have made optimal use of your employer's retirement plan, deciding whether to convert a traditional IRA to a Roth IRA, or planning for bequests to heirs or charities. We'll get to these matters later in this article. For now, the focus is on the threesome of allocation, tax-efficiency, and rebalancing, where human advice is unlikely to add value.
Best Firms for Automated Advice
Listed below are some firms that offer low-cost services for some or all of the threesome, either largely or fully automated. I've ordered them best-first, in my opinion, but encourage you to do your own comparison. You may find that in areas other than allocation, tax-efficiency, and rebalancing, a firm is stronger or weaker than implied by my ranking. Nor should you necessarily limit yourself to one firm. Comparing advice or splitting investments between a pair of them may be a sensible course of action.
1) Betterment. The estimated cost of a Betterment account, including ETF fees, transaction fees, and excellent methods of allocation, tax-efficiency, and rebalancing, is about 0.25% to 0.40%, for most accounts. Accounts over $100,000 get the smaller fees.
2) Wealthfront. Except for small accounts that get a discounted rate, a Wealthfront account will have total fees averaging slightly less than 0.40%, including ETF fees, transaction fees, and excellent methods of allocation, tax-efficiency, and rebalancing.
3) Vanguard. Using Vanguard's balanced and target-date funds, an account will have fees ranging from about 0.10% to slightly over 0.40%, depending on the particular fund and account size. Lower fees can be attained at Vanguard than at other firms reviewed here, but the methods of rebalancing and options for tax-efficiency, while good, are not the very best available.
4) Charles Schwab. This firm offers a service, Schwab Intelligent Portfolios, that is in many ways similar to Betterment and Wealthfront. Schwab's website implies that it has the lowest fees, but a close reading of their disclosures reveals the contrary, for two reasons. First, the service uses some specialized and third-party ETFs with higher average fees than Schwab's own lowest-fee ETFs. This raises the average fund-fee above the corresponding averages of the other firms reviewed here. Second, Schwab requires 6% to 30% of a portfolio to be held at the affiliated Schwab Bank, in a money-market fund, "thereby creating a potential conflict of interest" as acknowledged on page 1 of their disclosure document. The forced allocation to a money-market fund (to cash, in effect) is a lost opportunity, because the same funds could have been more effectively allocated to a broad basket of U.S. bonds at a much higher rate of interest. Combining the average ETF fees and opportunity cost, an estimate of Schwab's effective fees is 0.38% to 0.79%, for accounts with high to low stock allocations, respectively. *
Sensible Automation
In particular, three types of financial assistance permit automation that is probably better, and surely less expensive, than advice from a human adviser:
- Allocation. Many investment firms offer excellent online tools or calculators to help you decide what portion of your investments to put in domestic or international stocks or bonds or in short-term savings. Our calculators do this, and you can readily compare our recommendations to those of other good web-sites.
- Tax-Efficiency. Many firms also offer tools to help you decide whether to invest your next dollar in a taxable account or a tax-advantaged one. A few also have services that will execute deposits and withdrawals in taxable accounts in a manner that automatically minimizes the tax-consequences.
- Rebalancing. The best methods of rebalancing your portfolio have been automated by some investment firms. And many all-in-one, balanced, or target-date funds do a decent job of rebalancing. Paying someone to do it for you is truly unnecessary (and wasteful).
To be sure, a human adviser can be very helpful in other circumstances that are unique to you. Examples might include planning for a major purchase, developing your retirement budget, writing a plan to reduce your debts and increase your savings, picking a sensible set of insurance policies, determining whether you have made optimal use of your employer's retirement plan, deciding whether to convert a traditional IRA to a Roth IRA, or planning for bequests to heirs or charities. We'll get to these matters later in this article. For now, the focus is on the threesome of allocation, tax-efficiency, and rebalancing, where human advice is unlikely to add value.
Best Firms for Automated Advice
Listed below are some firms that offer low-cost services for some or all of the threesome, either largely or fully automated. I've ordered them best-first, in my opinion, but encourage you to do your own comparison. You may find that in areas other than allocation, tax-efficiency, and rebalancing, a firm is stronger or weaker than implied by my ranking. Nor should you necessarily limit yourself to one firm. Comparing advice or splitting investments between a pair of them may be a sensible course of action.
1) Betterment. The estimated cost of a Betterment account, including ETF fees, transaction fees, and excellent methods of allocation, tax-efficiency, and rebalancing, is about 0.25% to 0.40%, for most accounts. Accounts over $100,000 get the smaller fees.
- Allocation. When you invest in a taxable account or an IRA at Betterment, your funds are automatically distributed across a set of indexed, exchange-traded funds (ETFs) that have very low fees and are sensibly diversified. Using their online services, you answer a few questions and they provide a recommended allocation. You are free to adjust the allocation, if you wish, and their system will warn if you have chosen a risk-level that's unusually high or low, given the goals or purposes you stated for your investments.
- Tax-Efficiency. In a taxable account, Betterment will use a municipal bond ETF for some of the bond-allocation. Additionally, their algorithms will automatically minimize the tax consequences of selling and rebalancing your funds. Optionally, you can implement an additional service that will automatically monitor your account for opportunities to sell funds for a short-term loss that may be tax-deductible.
- Rebalancing. As noted in our article on rebalancing, Betterment's method is the best available. It automatically places incoming funds, including interest and dividends, into the funds that are most below-target. It also monitors how much your funds drift from their target levels, and if the amount of drift exceeds 3%, Betterment's algorithm then automatically rebalances all the funds to their targets. Then again, you may optionally turn off rebalancing, if you prefer.
2) Wealthfront. Except for small accounts that get a discounted rate, a Wealthfront account will have total fees averaging slightly less than 0.40%, including ETF fees, transaction fees, and excellent methods of allocation, tax-efficiency, and rebalancing.
- Allocation. Wealthfront's approach to allocation is very much like Betterment's, but the specific ETFs are somewhat different. Another difference is that Wealthfront automatically keeps a small allocation in cash, earning little or no interest. The cash balance has two sources: a set-aside to pay Wealthfront's future fees, and a residual amount left because Wealthfront's system does not allow it to allocate fractional ETF shares to an account holder. Betterment has neither of these limitations.
- Tax-Efficiency. For very large taxable accounts, Wealthfront uses a complex algorithm to generate tax-losses on individual stocks in large U.S. companies. This algorithm may be attractive to those wealthy enough to qualify. In other respects, Wealthfront's offerings for tax-efficiency are comparable to Betterment's.
- Rebalancing. Like Betterment, Wealthfront has automated the method found by our analysis to be the best available.
3) Vanguard. Using Vanguard's balanced and target-date funds, an account will have fees ranging from about 0.10% to slightly over 0.40%, depending on the particular fund and account size. Lower fees can be attained at Vanguard than at other firms reviewed here, but the methods of rebalancing and options for tax-efficiency, while good, are not the very best available.
- Allocation. A fund-search on Vanguard's website shows 23 balanced funds. One could easily use Vanguard's calculator or ours to find a target allocation, then pick a Vanguard fund that approximates the desired targets. Vanguard's Target Retirement and Life Strategy funds all implement a sensible strategy that balances a diversified set of domestic and international stocks and bonds, at rock-bottom fees. Other balanced funds have different allocations suitable for specific investment goals, often with slightly higher, but still very competitive fees.
- Tax-Efficiency. Vanguard offers just one balanced fund for taxable accounts, allocated 50% each to U.S. stocks and municipal bonds. This fund manages its stock holdings to maximize long-term gains and minimize taxable dividends and short-term sales. It's a different, more traditional approach than available from the other firms listed here. If you consider tax-loss harvesting to be more a gimmick than an investment strategy, the Vanguard fund may be right for you. If you live in a state with high taxes on income, you may want to consider Vanguard's state-specific municipal bond funds, but be prepared for potential extra work keeping them rebalanced with the rest of your portfolio.
- Rebalancing. Vanguard's balanced funds use undisclosed methods to keep their holdings aligned with their targets. Most likely, the method depends largely on how they direct deposits and withdrawals. In an analysis we did at able2pay.com, one of Vanguard's balanced funds was found to grow at a compound rate that was 0.5% to 1.3% less per year than by applying better methods like those used at other firms listed here. In short, Vanguard will do your rebalancing effectively, at the lowest available cost, but others may do it better.
4) Charles Schwab. This firm offers a service, Schwab Intelligent Portfolios, that is in many ways similar to Betterment and Wealthfront. Schwab's website implies that it has the lowest fees, but a close reading of their disclosures reveals the contrary, for two reasons. First, the service uses some specialized and third-party ETFs with higher average fees than Schwab's own lowest-fee ETFs. This raises the average fund-fee above the corresponding averages of the other firms reviewed here. Second, Schwab requires 6% to 30% of a portfolio to be held at the affiliated Schwab Bank, in a money-market fund, "thereby creating a potential conflict of interest" as acknowledged on page 1 of their disclosure document. The forced allocation to a money-market fund (to cash, in effect) is a lost opportunity, because the same funds could have been more effectively allocated to a broad basket of U.S. bonds at a much higher rate of interest. Combining the average ETF fees and opportunity cost, an estimate of Schwab's effective fees is 0.38% to 0.79%, for accounts with high to low stock allocations, respectively. *
- Allocation. Using an extensive set of questions, Schwab will determine an appropriate allocation for your investment goals and ability to tolerate risk. Compared to Betterment, they appear to place more emphasis of risk-tolerance; compared to Wealthfront and Vanguard, they allocate across a larger number of funds. But the basic idea is the same. Based on your inputs, Schwab automatically allocates your investments across a diversified set of funds.
- Tax-Efficiency. Schwab's methods of achieving tax-efficiency are very much like Betterment's.
- Rebalancing. Schwab takes the same excellent approach to automated rebalancing that Betterment and Wealthfront have implemented.
Advising Yourself
You won't have to look far to find a friend or relative who, during the Great Recession of 2008-2009, sold their stock funds in a panic and still holds the proceeds in low-yield bond or money-market funds. Stocks have since recovered all they lost and then some, while many bond and money-market funds have struggled to keep pace with even the modest inflation of recent years.
Look a little more, and you may readily find another acquaintance who bought internet darlings in 1999, in the myopic euphoria of the dot-com bubble. Many of those darlings went to ground and never recovered.
Know Your Limits
Emotional decisions, whether to sell in panic or buy in delusion, are an investor's worst enemy. If you plan to manage your own investments, be sure you have the mettle to tune-out the headlines, set a long-term plan, diversify your investments, and stay the course.
Ill-informed decisions are your second enemy. Some financial decisions are so complex that you either have to avoid them (if that's possible), study them deeply, or pay someone with the requisite expertise. Recognizing the complexity of a topic is a good starting point. At least you'll know when to ponder your readiness to do it yourself. Below are examples of decisions that should give you pause:
A Self-Adviser's Toolkit
Perhaps, after heeding all the cautions above, you've decided to be your own financial adviser anyway, at least in most areas. It can be quite rationale to do so, particularly if you enjoy reading financial literature and are adept with a spreadsheet. Here are some apps and tools you may find helpful:
Look a little more, and you may readily find another acquaintance who bought internet darlings in 1999, in the myopic euphoria of the dot-com bubble. Many of those darlings went to ground and never recovered.
Know Your Limits
Emotional decisions, whether to sell in panic or buy in delusion, are an investor's worst enemy. If you plan to manage your own investments, be sure you have the mettle to tune-out the headlines, set a long-term plan, diversify your investments, and stay the course.
Ill-informed decisions are your second enemy. Some financial decisions are so complex that you either have to avoid them (if that's possible), study them deeply, or pay someone with the requisite expertise. Recognizing the complexity of a topic is a good starting point. At least you'll know when to ponder your readiness to do it yourself. Below are examples of decisions that should give you pause:
- Converting a traditional IRA to a Roth IRA. It sounds simple. You do this if your current tax rate, at the time of conversion, is lower than the future tax rate when you would withdraw from the traditional IRA. But! Are you sure you understand your current and future tax rates? And what about a bequest to charity or an heir? Do you fully understand their tax rates? Do you know what type of gift or inheritance would be most generous to them? You really need a tax-expert to help with matters like this.
- Planning a budget to reduce debt and increase savings. If your debt-load is too high, you probably need behavioral coaching and support, in addition to financial advice. A firm, well-informed, supportive external voice can make all the difference.
- Setting a budget to start retirement. Try applying the method outlined in our article on retirement budgets. Or at least ask yourself two critical questions. Can you afford to postpone taking Social Security until you are 70? When retired, will the following sum be at least 75% of your pre-retirement gross (pre-tax) income: Social Security plus a pension (if you have one) plus annuity payments (if you've bought them) plus 4% of your combined retirement and savings accounts? If the answers are "yes," you are in great shape and may not need help from an adviser. Otherwise, you may be facing decisions that a financial professional or life-coach could help you resolve.
- Buying any type of annuity. Starting guaranteed payments from an annuity is an irrevocable decision. For that reason alone, it's a decision to be made only when you are certain. Making matters worse, many annuity contracts are complex, have high fees, and are aggressively sold. Good, independent advice is necessary. Get a second opinion from an adviser who understands annuities and has absolutely no financial interest in the transaction; in particular, it should not be anyone who is employed by an insurance company or who makes their livelihood by selling annuities. That said, sometimes a particular type of annuity is reasonable.
- Taking out or co-signing a large student loan. In some cases, interest on a student loan accrues immediately after the loan is taken, causing the debt to grow for years before income is available to pay it off. Should a student or co-signer face bankruptcy, it's difficult, though not always impossible, to have unpaid student loans discharged. If you're attracted to a federal loan that qualifies to be forgiven, contingent on the student's future employment in teaching or public service, be aware that the rules and limitations are complex. As a rough guideline, if a student's total loans exceed what he or she might earn in the first year after graduating, seek the advice of a professional who gets no compensation for providing or initiating loans. And get an objective financial analysis of alternatives like working more while studying part-time, or living rent-free with a relative while attending a local institution.
- Planning for long-term care. As life-spans extend and health care improves, a growing number of us will eventually need long-term care. Medicare doesn't cover the costs. Medicaid does, but only if one's assets, including all savings and possibly some home equity, have been depleted. Long-term care insurance is one potential way to avoid the worst case. But the policies are complex, not cheap, and sometimes not available from the best insurers. A type of deferred income annuity, called a Qualified Longevity Annuity Contract, may be an alternative. The simplest option may be to sequester some retirement savings as a medical reserve fund, which you can explore with our Retiree Reserve calculator. Fully comparing the options may require a multi-decade plan showing annual costs and assets adjusted for inflation (not a sales pitch from an insurance rep).
A Self-Adviser's Toolkit
Perhaps, after heeding all the cautions above, you've decided to be your own financial adviser anyway, at least in most areas. It can be quite rationale to do so, particularly if you enjoy reading financial literature and are adept with a spreadsheet. Here are some apps and tools you may find helpful:
- Websites of the best firms. Vanguard's Advice & Guidance website has a number of good calculators, tips, and planning tools for education savings, reserve funds, retirement, and more. They enable you to peruse the topics you might later review with a financial planner, flexibly and in complete anonymity. It's a great place to start, and you don't need a Vanguard account. You'll find it on the tab "Advice & Guidance." Before taking action from any of the Vanguard tools, however, compare their advice to at least one other source. Betterment's Resources tab also has excellent articles, often with good alternatives to Vanguard's recommendations. The Advice & Guidance tab at TIAA's website is well-organized, informative, and a good place to find an insurer's perspective.
- consumerfinance.gov. The Consumer Finance Protection Bureau is an agency of the federal government created to be an advocate for consumers of financial services and to protect consumers from abuses like those of the housing crisis that led to the Great Recession. Their website has excellent apps and articles on student loans, retirement, mortgages, debt counseling, and more. It's a good way to get a first or second opinion on many financial matters.
- Brightscope and 403bCompare. Respectively, these are the best apps to investigate the fees of your 401(k) or 403(b) retirement plan. A post on the able2pay.com News tab has step by step instructions for using each site.
- Bankrate.com's Calculators. Wait! Instead of creating your own spreadsheet to solve a financial problem, see whether Bankrate.com has a calculator that does what you want. They probably do. In addition to being comprehensive, their calculators are accurate, objective, and well documented. If legal cautions or tax consequences may exist, they'll be explained nicely. For complex or lengthy output, you'll often have an option to generate a printable report. Bankrate doesn't directly sell banking, insurance or investment products, but they copiously advertise the companies that do. It's a silent series of sales-pitches that are easy to ignore (or to pursue, if you are so inclined).
- Target Your Retirement. This free, online planner is really, really excellent. Designed by the Center for Retirement Research at Boston College, it works best for those who may be retiring 10 or fewer years in the future.
- MaximizeMySocialSecurity. Drawn from the work of Prof. Laurence Kotlikoff, this low-cost app is excellent for making decisions about retirement, widower, and disability benefits from Social Security. Using it is likely to pay back more in benefits than your price of purchase. Or, for a free alternative, try the retirement planner at consumerfinance.gov.
- ESPlanner Basic. This free online app generates a multi-year financial plan that is good for most purposes. Built by Prof. Kotlifkoff's company, it requires you to enter information about your family's ages, earnings, savings, housing, special expenses, and Social Security, along with your assumptions about investment returns, future tax rates, and inflation. From this data, the app generates detailed tables that project annual earnings, savings, and expenses, adjusted so as to make your standard of living as smooth as possible. You'll need about an hour's time learning how to use it, with the help of videos you can view at the website.
- Voyant. As an alternative to ESPlanner Basic, this online app is free to consumers and generates a comprehensive, multi-year financial plan. It includes options for retirement and special purchases, integrated with graphical tools for identifying what happens when. The company is primarily focused on offering its software to financial planners, but they make a version available for free to consumers. Be sure to use the right address, and be prepared to invest some time learning how to use the app: https://www.planwithvoyant.com/content/consumer/default .
Paying for Advice
You've decided that, at least in some areas, you cannot be your own financial planner. You want advice or coaching from a financial expert. How can you find one, and what are reasonable fees?
How Financial Advisers Are Paid
Financial advice or planning won't be free. Sometimes it may appear to be free, but when the advice is directed to you personally, there will be fees, somewhere, somehow. The main varieties are these:
Finding an Adviser
To emphasize what may be obvious, before seeking an adviser, know what you want them to do for you. Try to write a list of specific outcomes and timelines. Examples: I want to develop a budget to eliminate my debts within two years. I want to plan for the college education of my two children, who will start attending 6 and 10 years from now. I need a plan to start Social Security and retire at age 68, seven years from now. I need coaching to manage my budget, for the next 12 months, to become self-sufficient at controlling my expenses and savings.
How Financial Advisers Are Paid
Financial advice or planning won't be free. Sometimes it may appear to be free, but when the advice is directed to you personally, there will be fees, somewhere, somehow. The main varieties are these:
- Bundled fees. You may have this arrangement in your employer's 401(k) or 403(b) plan, or in your brokerage account. You have a named representative who can answer your questions, advise you on funds or insurance products, and perhaps even generate a written financial plan, all (they say) without charge. The catch is that you are already paying extra fees in your account to cover the adviser's salary. The extra fees may be set as a percentage of your total account value, or as higher-than-normal fees on the funds in your account, or both. The advice may (probably will) be slanted toward recommending the company's own products. You are paying for their services, so you might as well use them. But seek a second opinion, from an independent source. Even better, ask the adviser if they will sign a pledge like this one to act as a fiduciary, which means they will put your interests first.
- Commissions. A sales person won't sign a fiduciary pledge, because they get compensated for selling you a product. In some limited cases, that's fine. A good example: You've decided to purchase an inflation-adjusted, single-premium immediate annuity (see this article), and you have an independent insurance rep who will help you find one from a good company. This example is favorable because the insurance rep is not tied to a particular company (but press them for confirmation). A bad example: If you seek an investment firm for your IRA, you might pay load-fees or commissions to a salesperson, far above the cost of going directly to a the low-fee, high quality firm like Betterment or Vanguard.
- Fee-Only. Among financial planners, "fee only" normally means a recurring charge set as a percentage of your assets. For example, if your account is large enough (above a threshold of, say, $500,000 or $1,000,000) a typical adviser might charge an annual fee close to 1.00%. That would be $5000 per year on an account of $500,000. Recently, Vanguard initiated an advisory service at a much lower rate (0.3% per year) with a much lower threshold ($50,000). A "fee-only" adviser should be willing to sign a fiduciary pledge and to allow cancellation of all services after a reasonable interval (ideally at any time or, at the very least, after 12 months).
- Flat-Fee or Hourly. A minority of financial planners will agree to hourly charges or flat fees for a particular deliverable. Examples might be advice on converting from a traditional IRA to a Roth IRA, or planning a budget to transition from employment to retirement, or being coached on paying down debts. You would typically pay this way for tax or legal advice. Alas, too few financial planners operate in this manner. Some do, however, as detailed below.
Finding an Adviser
To emphasize what may be obvious, before seeking an adviser, know what you want them to do for you. Try to write a list of specific outcomes and timelines. Examples: I want to develop a budget to eliminate my debts within two years. I want to plan for the college education of my two children, who will start attending 6 and 10 years from now. I need a plan to start Social Security and retire at age 68, seven years from now. I need coaching to manage my budget, for the next 12 months, to become self-sufficient at controlling my expenses and savings.
- Garrett Planning Network is an association of independent financial advisers, many of whom will work for flat fees or hourly charges. You can search by location or the type of advice you are seeking. I particularly like their tips on how to chose an adviser.
- LearnVest is a company that specializes in low-cost financial coaching. They charge a recurring monthly fee that gives access to phone-only advice from a personal planner and to state-of-the-art online tools for developing financial plans and budgets. Originally an independent start-up, LearnVest was acquired early in 2015 by an excellent insurance company, Northwestern Mutual. It is not clear whether this will affect their advice and services.
- Fee Only Network is a search engine sponsored by NAPFA, the National Association of Professional Financial Advisers. You can use it to find a list of fee-only advisers in your area. If you go this route, ask the candidates whether they will match Vanguard's low rate of 0.3% or, even better, offer flat or hourly fees to help you in the specific areas.
Disclaimer: Nothing here is intended as an endorsement, offer, or solicitation for any particular firm, investment, security, or type of insurance. Able to Pay LLC receives no commission, referral fee, or other contingent compensation from any firm or agency mentioned here. Read our full disclosures and Fiduciary Oath.
* Schwab's effective fees were estimated as follows. For funds with a low allocation to stocks, according to Schwab's website, the average ETF fee is 0.18%. The allocation to cash is 30%, earning interest currently at 0.08%. Had the cash been invested instead in an ETF broadly indexed to U.S. Treasury and corporate bonds, it would earn 2.1%, after subtracting fees. Thus the opportunity cost is 0.30 * (.021 - .0008) = .00606 or 0.606%. The total effective fee is 0.18% + 0.606% = 0.786%. For an account with a high allocation to stocks, the average ETF fee, according to Schwab, is 0.26%, and the cash allocation is 6%. Thus the opportunity cost is 0.06 * (.021 - .0008) = 0.001212 or 0.12%, and the total effective fee is 0.26% + 0.12% or 0.38%. A similar conclusion can be reached by using the long-term real return on cash, as represented by T-bills, which is virtually zero, vs. the long-term real return on intermediate Treasury bonds, which is a bit higher than 2%. By this metric, the opportunity cost of cash is 2%, regardless of the inflation rate.