Invest and prosper

This website focuses mainly on independent investing. Yet, there are instances when one may want to hire a financial professional.

Why hire a financial professional? One’s portfolio may be too big to effectively self-manage. Perhaps one is too busy to devote the necessary time to portfolio self-management. One may also want to have professional experience on his or her side.

But whom does one hire? John G. Wells, in his book “Kiss Your Stockbroker Goodbye: A Guide to Independent Investing,” suggests working exclusively with fee-only advisers. The reasons for this are as follows:

1. The fee-only adviser has no ulterior motive in making investment transactions, since transactions themselves do not affect the fee-only adviser’s income.
2. The fee-only adviser has a vested interest in making money for clients, since the fee-only adviser’s income is directly affected by the performance of the client’s portfolio.

A fee-only adviser typically charges a percentage of the value of the portfolio that he or she manages. Therefore, if a client’s portfolio grows in value, a fee-only adviser is rewarded with a higher fee. Conversely, if a client’s portfolio diminishes in value, a fee-only adviser is penalized with a lower fee.

On the other hand, a commission-based adviser generates his or her income by making transactions. This means that whenever a client (you) purchases or sells investment products, the commission-based advisor makes money. Thus, a commission-based adviser gets paid regardless of whether or not he or she makes you money. This seems far from ideal.

Working with professionals -part 2 will follow shortly.