One of the most foundational things to know about your investment account is how you pay for the services you receive. There are three common ways to pay for the management of your account. Let me first say that there are many, many financial institutions and brokerage firms in existence today. This is a general overview. It is important that you talk with the firm that you are dealing with if you wish to learn exactly what the expenses are for your account.
The first option is to do it yourself by using an online discount brokerage firm. This is typically the least expensive way because you are filling out the paperwork, doing the research, establishing the plan and executing the trades by yourself. Online brokerage firms will usually have information that you can read to learn about different types of plans and investments. This information can be very helpful, but it is important to invest the time in learning about what you are doing if you go this route. The reason that online brokerage firms are less expensive is because they do not usually offer personalized advice from somebody that has taken the time to learn about your situation and they usually do not have local offices. Typically everything is handled over the Internet or via a toll free 800 number. This allows them to keep their expenses lower and pass those savings along to you. Online brokerage firms usually offer no load mutual funds and low cost stock transactions.
The second common way is to work with a stock broker who will charge a commission. Though it depends on the type of investment, usually there will be either a commission to purchase the investment, a commission to sell the investment, or both. The advantage to dealing with a stock broker is that they should have a broader base of knowledge when it comes to investments and they can help you make educated decisions. In addition, this can be a cost effective way to invest for a long term investor. Since you are only paying to buy or sell, then your fees should stay low if you own investments for long periods of time. The disadvantage, unfortunately, is that there is a direct conflict of interest between the broker and the client. The stock broker is paid by making transactions (and therefore generating commissions) regardless of whether or not it is in the best interest of the client. For this reason it is very important to trust in the integrity of your stock broker if you choose to use one.
The third way to pay your financial advisor is to pay a percentage of the assets that they are managing for you. This fee typically ranges from 1 percent to 2 percent of the assets in the account annually, though it can vary widely. The advantage to this type of fee structure is that there are typically low fees or even no fees to make a transaction in your account. In this scenario the financial advisor is not paid based on how many transactions that he or she makes, but rather on the size of the account. So the more money that your advisor makes for you the more money they make for themselves as well. One disadvantage is that you do pay the advisor for managing the account even if the account is down in value.
There are many different companies out there and making an educated decision about who to deal with can be difficult. Over the next few weeks, we will look at these different options in more detail so that you can be as a good a steward of your investment dollars as possible.
Jeff Hupman is a financial advisor with Christian Values Investing. He can be reached at 748-9321.
