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Opinion: Finding A Good Financial Adviser Without Paying Too Much

Kent Smetters is an economics professor at the University of Pennsylvania's Wharton School. To educate people about how to save and invest more successfully he hosts a radio show, "Your Money," on Sirius XM which, along with his website KentOnMoney.com, he does pro bono. As part of NPR's "Your Money and Your Life" series, we asked Smetters for tips on finding a financial adviser:

Finding a good adviser involves two key steps:

First, only choose a "fee-only adviser." Don't be fooled by the expression "fee based" — that's a wolf in a sheep's clothing. The word "only" is critical. By law, a "fee-only" adviser must place your interests first and not accept hidden commissions from mutual funds, insurance companies, or anyone else. Such commissions create incentives for advisers to steer you into higher-cost investments that can radically reduce your account balances over time. If you find a fee-only adviser who charges by the hour, a reasonable fee is $250-$400 per hour. You might need just a few hours so this is often the best way to go. Other fee-only advisers take a percentage of your total assets that you're investing. In that case, a reasonable annual fee is between 0.25 percent (for $1 million or more) and 0.75 percent (if less). But if you pay as a percentage of your assets, then do the following: convert the percentage paid to actual dollars; discuss openly how much work they are doing; and, if you think the amount being paid is unreasonable, shop around for other quotes.

Second, you want an adviser who believes in "low-cost passive-indexed diversification." That's fancy language but important. All it means is that your adviser is using low-cost investments (often index funds) while not trying to "beat the market." Keeping costs low is critical for creating wealth over time. And by buying an index of stocks, say the S&P 500, you can very cheaply just "ride the market" up over time. The evidence is very clear that even skilled investment managers who try to "beat the market" generally can't do it. In other words, paying people to pick stocks for you usually means you pay higher fees and make less money.

As far as fees, the fees in this type of a diversified investment portfolio should be no more than 0.15 percent, not including the advisory fees noted above. In other words, the total cost of managing your money should be less than 1.0 percent if you are using an adviser, and around 0.15 percent if you go at it alone.

For small business owners offering a retirement plan like a 401(k), it is highly likely that you and your employees are paying way too much for it. Even a small 401(k) with less than $5 million should have a "total all-in fee" (or "total expense ratio") of less than 0.75 percent. Larger plans should have even smaller expense ratios. Shop around. I recommend the following firms: Vanguard, Ubiquity and Employee Fiduciary. Ask for the simplest 401(k) program without too many bells and whistles.

If you are an individual investor, the chances are even greater that you are overpaying. To find a fee-only adviser, I generally recommend the websites provided by NAPFA and the Garrett Planning Network. However, even some fee-only advisers are too expensive and not using low-cost passive indexing. So, I screen fee-only advisers that I really like on my website. It has a smaller list but it is quickly growing. If you find an adviser who is not on my list, tell them to contact me via the website and I'll add them to my list of advisers to screen.

Copyright 2021 NPR. To see more, visit https://www.npr.org.