Investing with a pro or going it alone

By Walter Updegrave, senior editor


(Money Magazine) -- Question: I'm 45 and leaving my current job to go back to school. I plan on rolling my 401(k) into an IRA. An adviser has suggested I use a managed fund program to invest my IRA money at a cost of 1.5% a year. But I wonder whether I would be better off just investing my IRA in no-load mutual funds that I choose. What questions should I be asking myself and what should I be asking the adviser to make this decision? -- Suzie Q., Charlotte, N.C.

Answer: The question you pose -- am I better off going it alone or opting for some sort of professional help with my 401(k), IRA, or other investment accounts? -- is a perennial one for individual investors.

walter_updegrave__2009b.03.jpg
Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005)

But I suspect that even more people than usual are grappling with it today. Why? Well, it's easy to feel sure about your ability to manage your retirement stash when the market's on a roll and your account balance is climbing, as was the case from mid-2002 through late 2007.

But such self-assurance can be easily shaken after you've seen the considerable damage the markets can inflict on your nest egg during a meltdown like the one we suffered through in 2008 and early 2009.

Ultimately, of course, neither I nor anyone else can tell you what answer is right for you. That will depend on a variety of factors, ranging from how confident you feel as an investor to how much money is at stake.

But I can suggest a few questions you might put to yourself and your adviser -- and throw in a couple of other recommendations -- to help you help you come to a decision that makes the most sense for you.

What to ask yourself

What kind of help do I actually need? This is important because unless you know what sort of assistance you really require, you may end up with the wrong type or paying for more services than you want. In the case of your rollover IRA, for example, the first thing you need to do is set the right asset allocation, which is making sure you've got a blend of stocks and bonds that's appropriate for your age and risk tolerance.

Once you've settled on the right mix, you can then choose specific stocks and bonds (or, more likely, stock and bond funds) to fill out your IRA portfolio. You must decide whether you want help with just one of these tasks, both, or perhaps even more assistance, like figuring out how much you should be contributing to your IRA year to year to assure you have a reasonable shot at building a nest egg large enough to support you when you retire.

How comfortable am I dealing with financial matters? If you're really unsure of yourself when it comes to your finances, then it may make sense to pay for a pro's services, whether it's just for help with investing or broader planning. But if you feel you know the basics of investing and planning, you may be able to build the IRA portfolio you need without shelling out annual fees.

Many no-load fund companies, including biggies like Fidelity and T. Rowe Price, offer a variety of online tools and information that can help you create a diversified portfolio on your own at no charge (although you would still have to pay the annual management fees for any mutual funds you include in your portfolio). You'll also find a useful array of tools in our Calculators section.

Am I willing to put in some time and effort? You don't have to devote all your waking hours to following the markets to be a successful investor. Indeed, as I point out you're probably better off taking a more laid-back approach. Still, if you're going to invest on your own, you should be willing to spend a couple of days initially putting together a portfolio and choosing investments, and then a few hours each month monitoring your holdings just to make sure you're still on track. If you're not up to putting in even this minimal effort, you're probably better off getting help.

What to ask the adviser

What specifically are you going to do for me? A "managed fund program" can mean many things. Is the adviser going to create a diversified portfolio of different funds based on your goals and risk tolerance? If so, will the adviser rely software or other tools to do that, choose from a pre-selected menu of portfolios or use some other approach? If the adviser is recommending specific funds, does he or she have access to all fund families' offerings? Or is the adviser limited to funds of certain firms? Once you've signed up, what kind of monitoring and follow-up will there be to assure the program is working?

What's it going to cost? Is the 1.5% annual fee you mention the all-in cost? My guess is that this is the charge for choosing and managing the funds and that you'll also be paying underlying fund management fees. Whatever the arrangement, you want to see in writing the total amount you'll pay in all fees, including sales commissions, if any, as well as all annual levies you'll pay. Is there an exit fee if you decide to leave? I'd also want to know how the adviser is being compensated and how much he or she is receiving.

What are your qualifications? The last thing you want to do is fall prey to a Bernie Madoff clone, or for that matter someone who's not an outright crook but peddling dubious or high-cost products. Part of the financial regulatory reform proposed by the Obama administration and that's now wending its way through Congress could, among other things, change the rules about whether an adviser must meet a "fiduciary" or "suitability" standard -- essentially whether an adviser's recommendations must be in the client's best interest or just suitable even if better options are available.

Lord knows how long it will take to hash out this issue and what the outcome, for better or worse, will be. In the meantime, though, before you sign up with any adviser, ask what qualifies him or her to be providing this investment advice and what regulators he or she is registered with. Then check with federal, state, and industry regulators on your own to make sure your adviser doesn't have a shady past. And make sure the adviser does not have direct access to any money you invest through him or her. Your investment funds should be held by an independent brokerage firm or custodial bank.

Keep in mind that there are other arrangements you might consider. Instead of an ongoing relationship with an adviser that involves a yearly fee, you could work with an adviser willing to accept a one-time fee to create a portfolio and make fund recommendations. You would then monitor your holdings yourself and, if necessary, pay the adviser on an hourly or project basis if you need more help down the road. You might also think about splitting your money into two IRAs and having an adviser manage one while you oversee the other.

Finally, remember that your decision isn't irrevocable. So if you sign up for this program and things don't work out the way you had hoped -- or, conversely, you find you don't like managing your IRA on your own -- you can always change your mind (and your approach) later on. To top of page

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