This post contains opinion of Misook Yu and is for general information only. Consult a financial advisor for more information.

Q: What does a financial advisor do?

A: A financial advisor helps his/her clients reach their financial goals and objectives. A good financial advisor draws a holistic plan, managing all of one’s financial aspects such as investment, retirement, insurance, education saving, estate planning, etc. while working with other professionals such as a CPA and an attorney as needed. In a way, a financial advisor is like a conductor in an orchestra.

Q: What are the differences between a financial advisor and a financial planner?

A: Often times, the terms financial advisor and financial planner are used interchangeably. Two people with the same qualifications and tasks may call themselves either a financial advisor or a financial planner. That’s because these titles are not regulated by law, unlike a CPA or an attorney. A financial planner is often considered to be a type of financial advisor who holds a CFP (Certified Financial Planner) which requires specific education, a rigorous test, and work experience. But as mentioned earlier, neither is a legal term, and there are many professionals with CFPs who call themselves financial advisors. So carefully check one’s qualifications before hiring a financial advisor or financial planner.

Q: Why should I care how my financial advisor is paid?

A: There are basically three ways that financial advisors get paid.

• First, they get commission by selling products (commission-based). When investors buy products that are recommended, the financial advisor receives commission from the company whose products he recommended. And there may be ongoing direct/indirect compensation that is paid to the advisor and the company that he works for. This model has an inherent conflict of interest because advisors may be motivated by higher commission that is offered by certain financial products/companies, although that product may or may not be most appropriate for a given individual.
• Second, they get paid a percentage of investors’ total invested assets, which is called fee-based. This gives financial advisors freedom to choose whichever investment product they feel is better suited for a given individual, minimizing conflicts of interest. The problem with this model is that financial advisors need to require certain minimum assets to be able to provide quality service in limited time. For example, if the annual fee is 1% of invested assets, a client with $10,000 in assets would end up paying the advisor about $100 a year, while a client with $200,000 will pay $2,000. This is why many financial advisors require a minimum investment amount, often $250,000 or $500,000.Fee-based advisors may also receive commission for selling certain products such as annuities.
• Third, financial advisors get paid by the hour or by monthly fees (fee-only). The service fees are often based on complexity and time required to manage one’s financial matters, and by not receiving any commission and therefore eliminating conflicts of interest, fee-only advisors can work only for their clients’ best interest. This model seems to be gaining popularity, especially among younger people, as more investors become knowledgeable of the compensation structure in the financial advisory industry. People who do not want their financial advisor to have any conflict of interest and do not want to continuously pay a certain percentage of their assets may prefer a financial advisor with a fee-only model.

No matter who you decide to work with, it’s very important that you fully understand how your financial advisor is paid. You should know if your financial advisor receives a referral fee when he recommends you to others, such as a CPA or a lawyer, because that fee may affect his choice of recommendation. The computation in the commission-based model can be complicated, so ask your financial advisor to calculate what it directly/indirectly costs you to have him as your financial advisor. It’s your right to know exactly how much you pay for any given service.

Q: Why does it matter which account I invest in?

A: Investment accounts are not created equal. Even if you invest in the same securities, depending on the type of account you use, you may or may not be able to deduct the principle amount AND delay paying income taxes on the profits for a long time. This makes a significant difference in your asset accumulation. Therefore, it’s recommended that you invest in accounts that provide tax benefits over others that don’t. Talk to your financial advisor to find out which accounts are most beneficial for you.

Q: What are the differences between stocks and mutual funds?

A: If you buy a stock, you own a portion of a company. If the company does well, so does your stock and vice versa. A mutual fund is like a basket of many securities such as stocks, bonds, and cash equivalent. A share of a mutual fund is issued by an investment company that pools money from individuals and then invests the funds into many securities from different companies. Investing in mutual funds is an effective way to diversify especially for small investors who can’t adequately diversify by themselves. But there may be fees involved in mutual fund investment to cover costs for fund managers along with other associated expenses. Both stocks and mutual funds are two types of securities. Click here to learn more.

Q: Isn’t Investing too risky?

A: Driving is risky, but not driving brings other sets of problems, such as not being able to go to work to make money. Likewise, not investing due to the fear of risks comes with other issues. Ironically, keeping money in “safe” cash is a sure way of losing its value. That’s because your cash will lose its purchasing power due to inflation over time. Imagine that in the late 60’s when an average annual household income was about $7,000, your (grand) parents had $7,000 in a “safe” checking account and left it alone for almost 60 years. How much would that money, which once was a median annual household income, be worth today, when average US household income is around $80,000? Since banks rarely pay interest payment in a checking account, it’s likely that the $7,000 kept “safe” for so many decades is still the same, losing more than 90% of its purchasing power. So, the real question you should ask yourself in my opinion is: can you afford NOT to invest?

Q: What are points (fees)in mutual funds?

Points are percentage rates that actively-managed mutual funds charge to investors. Depending on the amount of investment, it usually runs somewhere from 6% to 0%; the more you invest, the less percentage you pay, decreasing to 0% for over $1 million usually. For example, if you invest $10,000 into a mutual fund, about $600 will be deducted and your initial investment amount will show as $9,400. The points are charged whenever new money is invested but waived if an investor wants to switch funds within the same family. A majority of the amount that investors pay for points is paid to the brokerage company (sales person) as commission.