DAVID GREENE, HOST:
All this week in our series Your Money and Your Life, we've been talking about saving for retirement. A couple days ago, we heard about a do-it-yourself option, going online and investing with the help of a robo-adviser. Well, perhaps you would prefer a human being, and if so, NPR's John Ydstie is about to tell you what you should look for and what you should try to avoid.
JOHN YDSTIE, BYLINE: The first thing to realize about financial advice is that it's not free, and it often costs more than you think. That's what Morra Aarons-Mele found when she decided to find a financial adviser after she inherited an IRA from her father.
MORRA AARONS-MELE: I felt like I wanted an adviser because I was uncertain about - I never had any money before, frankly (laughter). And, you know, I really wanted to be a good steward of it.
YDSTIE: She found an adviser who charged her a yearly fee of 1 percent of the value of the IRA. That's pretty standard. But after receiving some quarterly reports, she started feeling uneasy about all the added fees.
AARONS-MELE: The fees were all over the place, so that even though my fee that I had agreed with my adviser seemed completely reasonable, it was that there seemed to be all these hidden fees in various funds.
YDSTIE: So in addition to paying her adviser 1 percent a year, Aarons-Mele was also paying a lot to managers of the mutual funds in her portfolio. The average U.S. mutual fund charges just under 1 percent in fees. That may sound like small change, but the impact can be truly dramatic. Over 30 years, paying 1 percent annually for advice and another 1 percent for your mutual funds could cut your retirement gains almost in half. So keeping fees much lower than average is critical, says Kate Fries, a retirement adviser at The Family Firm based in Bethesda, Md. Fries also charges a 1 percent fee for her advice, but she's all about keeping the other fees to a minimum.
KATE FRIES: The vast majority of the time, whether in an index fund or ETF, it should be well under a half a percent.
YDSTIE: An ETF is a basket of stocks traded like a single stock in the stock market. Often, investors pay too much in fees because their advisers get commissions from mutual fund companies to steer business to high-fee products. But Fries is a fiduciary, which means she is required to put her clients' interests first. That's something you should insist on when you seek financial advice. Of course, paying close to 1 and a half percent also could cut significantly into your investment returns, so why not just invest on your own in one of those cheap robo-advisers online? Well, Fries argues it can be worth it to pay for a human adviser. She says they can help organize your finances to achieve your goals and, when you're ready, structure your retirement. She also says she protects her clients from themselves.
FRIES: It's really hard when the market is as volatile as it was this past August and to not knee-jerk react and decide, oh, gosh, is now the time to sell? You know, I don't want to lose everything.
YDSTIE: But here's the problem for the vast majority of Americans. They don't have enough money to access Fries' advice. Her firm requires a $600,000 minimum investment. But there is a new model emerging for providing less expensive retirement advice. It's being offered by a number of firms, including a recent startup named Rebalance IRA. Its managing director, Scott Puritz, says the model is a hybrid that keeps costs low by combining human advisers on the phone and technology online.
SCOTT PURITZ: Rebalance IRA charges a half of 1 percent for retirement investment advice for our clients.
YDSTIE: That's half the cost of a traditional investment adviser. And Rebalance builds investment portfolios of index funds and ETF's that add just two-tenths of a percent to the fee.
PURITZ: So our clients experience all-in, everything-type cost of seven-tenths of 1 percent per year.
YDSTIE: But rebalance IRA requires a minimum investment of a $100,000, and Vanguard's similar service requires a $50,000 minimum. That still excludes the majority of Americans. To fill that gap, a new network of financial planners has sprung up. It's called the XY Planning Network. Christina Guglielmetti of Future Perfect Planning is one of them.
CHRISTINA GUGLIELMETTI: We are all planners who are trying to deliver our quality, fiduciary financial planning services to clients who have traditionally been cut out of financial planning.
YDSTIE: Her clients are often younger people - freelancers, new parents. Guglielmetti charges them $500 for an initial plan. She charges about a $100 a month to be on retainer. And like some other planners in her network and elsewhere, she'll work for an hourly fee. John Ydstie, NPR News, Washington.
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