Hire a financial advisor or take the DIY approach
You may hear the acronym DIY (do it yourself) and think of the headache from your last home improvement project. Well, deciding between doing it alone or hiring a professional deserves just as much thought and planning.
Some factors in making this decision are your level of investment expertise, the complexity of your portfolio and financial goals, the amount of time you have to dedicate to handling your investments, and your overall willingness and ability to pay for financial services. While this may differ from person to person, in general the choice comes down to managed versus transactional accounts.
Managed investment accounts
Managed accounts are investment accounts that are primarily overseen by a professional manager such as a financial advisor. Today, these are usually fee-based accounts, which can include advisory fees, management fees that are charged as a percentage of total assets under management, administration fees, and fees from the underlying investments. The fact that these accounts are fee-based means that advisors should not be incentivized to sell products and services on which they earn commission. A commision is a fee paid to an advisor for providing investment advice or handling the purchase or sale of a security.
These accounts can be discretionary or non-discretionary. With a discretionary managed account, the advisor can make buy and sell decisions without consulting the client. However, the advisor must still act as a fiduciary – i.e., act in the client’s best interest. In other words, the client is trusting the advisor to manage their assets without having to discuss each and every decision. With a non-discretionary account, the advisor must obtain the client’s prior approval before taking any investment actions.
The benefits of using managed accounts are relying on a professional asset manager’s experience and resources for best-in-class execution, but keep in mind this may come with additional fees.
Transactional investment accounts
The DIY approach is done using transactional accounts, which are mostly associated with brokerage companies (e.g., Etrade and Ameritrade). An investor can open these accounts directly, usually online, with a brokerage and make their own trading decisions. The fees associated with these accounts are usually commissions, administration fees, and fees from the underlying investments.
While brokerage companies may provide research and analytical tools to help you make investment decisions, you are solely responsible for managing this type of account. Thus, a transactional account may be a good choice for more sophisticated investors who feel comfortable managing their own portfolios and want to minimize costs from advisory fees.
Fintech enables the best of both worlds
With these are the broad types of investment accounts, today’s rapid advancements in financial technology are beginning to blur the lines. For instance, robo advisors that provide some degree of advice while allowing investors to ultimately make their own decisions are now available with much lower fee structures than traditional managed accounts. Fintech enables lower fees, greater accessibility, and more flexibility. Whether using a robo advisor is appropriate depends on your preferences and circumstances.