'Give me your money.'

Kiplinger's Personal Finance Magazine, August, 1998 by Steven T. Goldberg

Plenty of advisers will put you into no-load mutual funds--but at what cost?

You've got money to invest and not a clue what to do. Hey, are you popular. Psychologists, housewives, engineers; former military personnel and even ex-ministers are flocking into investment management to help the perplexed invest in no-load mutual funds in return for a percentage of the assets. Who are these newbies? Meet John Kosta, who runs a travel agency in Ann Arbor, Mich. Kosta manages about $500,000 for others and plans to enter the field "hook, line and sinker" in two or three years when he sells his business. Like Kosta, many of the new money managers started by investing their own money, then began giving friends and relatives advice, and finally decided that they could make a living at this. Kosta reports that he couldn't find anyone better to run his firm's 401(k) plan. "I just wasn't all that impressed with what I found," he says.

These fledgling investment advisers join established financial planners in offering such services, and all are responding to a real need. People are amassing larger nest eggs and many lack the time or confidence to invest it. "There's something magical about age 50," says Mark LaSpisa, a Chicago planner. "People become serious about retirement. You don't have to convince them that they need financial planning."

The sticking points, of course, are how much this advice should cost and who is competent to give it. Planners and advisers will typically put your money into no-load funds in return for 1% per year of the invested assets. That is small potatoes--a bargain, almost--in years that produce 20%-plus returns. But the stock market won't always be so generous. A prudent investor should assume at some point a return to the long-term norm of 11% or so in yearly gains.

So let's do the math: First, pay your federal and state taxes on an 11% gain--knocking, say, three percentage points off your return. Next, account for inflation, which is likely to negate another three percentage points of your gain most years. You have to pay the fund its expense ratio, which in the case of no-load funds in the Charles Schwab supermarket (used by many advisers) averages 1.4%. What you have left of that 11% return is 3.6%, of which one percentage point goes to the adviser. In other words, the price of that advice over time is likely to consume almost 30% of your after-tax, after-inflation gain.

Critics say few advisers or planners can earn that 1% fee for you by astute investing. "I think one percentage point is too high," says Andrew Hudick, a financial planner in Roanoke, Va., and past president of the National Association of Personal Financial Advisors. "What value are consumers receiving for that?" Hudick charges "significantly less" than one percentage point and uses mainly low-expense Vanguard index funds.

Advisory fees for mutual fund investments are coming down. But it can be hard to find someone who, like Hudick, will take on clients with less than $100,000 to invest for less than 1% of the amount annually. In fact, advisers are raising their minimums. Some financial planners (as opposed to investment advisers, who don't offer as broad a range of services) insist that you pay for a financial plan (often $2,500 and up) to get you started.

Such plans offer useful guidance on a wide range of needs, including insurance and estate and tax planning. But not everyone needs a full-blown plan, which can delve into your spending habits in excruciating detail. For example, Standford University finance professor William Sharpe examined planning software that even prompts advisers to ask clients how much they intend to spend at the hairdresser in retirement.

ASK ABOUT CREDENTIALS AND FEES

Given all this, how should you proceed if you have money to invest but don't want to choose the funds?

First, seek experienced advice. You may do a lot worse if you find someone who will invest your money on the cheap but does so ineptly. Experienced financial planners who possess both good credentials and a track record as fund pickers for other clients should get the edge. Rookies may make odd investments for you. Travel agent Kosta, for example, has his firm's pooled 401(k) money invested in a curious mix: 30% in Asian funds, 30% in supervolatile zero-coupon bond funds, 15% in cash and the remainder in six stocks listed on Nasdaq.

A certified financial planner, or CFP, is probably the best credential to look for. Be wary of some others. For instance, anyone in the financial advisory business must be a registered investment adviser with the Securities and Exchange Commission or state securities agency. And the International Association for Financial Planning, IAFP, is a membership organization that requires little more than filling out a form, signing a code of ethics and mailing a check.

Don't hesitate to bargain. The more you bring to the table to invest, the smaller the percentage of your money you pay. "It takes the same time to make a phone call to a $500,000 client as to a $5-million client," says Mark Spangler, a financial planner in Seattle who, like some other fee-only planners, charges all clients the same rate. Robert Veres, editor of Inside Information, a newsletter for financial planners, says the break point from the 1% norm is typically when you invest $500,000--the adviser's cut might drop to 0.75 percentage point. The next cut might be to 0.5 or 0.6 percentage point, at $750,000. With more than $1 million, everything is negotiable, he says, including the possibility of a flat fee.