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3 Types of Financial Service Relationships

When you start to earn more than what covers rent and groceries, you may start looking for ways to make your money work for you.

Even if you have been investing and saving for retirement for a while, you may wonder if you’re as effective as it could be.

You want to be smart with your money, you just aren’t sure the best relationship for you, and you know that in a volatile market, the wrong decision could cost you.

It’s time to look at a few of your options:

1. Brokerage Relationship
2. Robo-Advisor
3. Financial Advisor

1. Brokerage Relationship

Stockbrokers are registered by the state(s) in which they practice to buy and sell securities products such as stocks, bonds and mutual funds. Stockbroker is a generic term that can be used for a variety of roles. They generally earn commissions on transactions.

What services do stockbrokers offer?

While some brokers offer additional services, for some, their main offering is to recommend which stocks to buy and which to sell.

“Stockbrokers are ‘stock pickers,’” says Joe Burgess, founding partner and wealth advisor at Moxie Wealth Management, an affiliate of North Star. “They don’t really create a strategy for you but are just focused on performance.”

How much does a stockbroker cost?

The cost of working with a stockbroker depends on their commissions and trading fees. You may also need to maintain a minimum dollar amount in your account to meet investment requirements.

Is a stockbroker right for you?

Working with a stockbroker may be a good way to get started in investing. But keep in mind, they may have limited services, so they aren’t always the best choice for long-term investing.

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2. Robo-Advisor

Robo-advisors, also known as automated investment or online advisors, use computer algorithms and advanced software to build and manage your investment portfolio.

What services do robo-advisors offer?

Robo-advisors can manage individual retirement accounts and taxable accounts. Some also manage trusts and a few will help manage your 401(k).

Working with a robo-advisor means you will receive little to no human interaction and personal advice.

Often, when you sign up for an account with a robo-advisor, you will fill out a questionnaire telling the computer your risk tolerance, goals and investments. Then, the program will generate a recommended portfolio for the “generic you.” You can pick and choose which investment options you prefer, but you don’t get the chance to discuss your options with an interested professional.

“Robo-advisors offer low cost, turnkey portfolio creation and management services online,” says Nicole Winter Tietel, LUTCF, president of Winter & Associates, Inc, a partner firm of North Star Resource Group. “Portfolios are pre-established and created using algorithms. You answer questions about your risk tolerance and the robo-advisor will provide your recommended investments.”

You can also expect:

  • Rebalancing of your portfolio automatically or quarterly via a computer algorithm
  • Basic financial tools, such as retirement calculators
  • Tax-loss harvesting and other tax-strategy offerings

How much does a robo-advisor cost?

Robo-advisors are relatively cheap. They typically costing an 0.25% to 0.50% annual management fee. This means you could pay as little as $25 a year to keep $10,000 of assets in your investing account.1

Usually, you will not pay a transaction fee with a robo-advisor.

Minimum investment requirements vary based on the robo you choose, ranging from $500 to $10,000 or more.

Is a robo-advisor right for you?

“Robo-advisors may be ideal for newer savers just getting started, or rollovers of smaller account balances,” says Tietel. “Additionally, they are helpful for people who don’t have a lot of time to manage their investments and want to use technology to provide their specific portfolio allocations.”

Robo-advising is an inexpensive start for investing, but you can only go so far with a computer. You may miss being able to have a conversation with a real person about your concerns and goals and the benefit of having a strategy that is custom to you not just people like you.

“Robo-advisors make very general recommendations,” says Burgess. “They don’t make a strategy specific to you or your situation, and they do not manage behavior, helping investors avoid financial mistakes based on emotion (often fear or greed).”

If you’re nervous about automated investments, a financial advisor may be a better choice for you.

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3. Financial Advisor

What services do financial advisors offer?

Each financial advisor offers different services and has different specialties, but most focus on helping you increase your assets while managing risk.

They help with retirement solutions, investment selection, student loan repayment and estate planning. Some offer additional resources such as life and disability insurance, property and casualty insurance, employee benefits planning, long-term care preparation and Medicare supplement.

The number of services a financial advisor provides is largely dependent on the resources they receive from their supervising firm.

Capabilities of North Star Advisors

The main difference with financial advisors is that they work from a strategy and then build a portfolio that can help you achieve your goals.

“The most valuable benefit of a financial advisor is that the strategy drives the portfolio,” says Burgess. “Also, advisors take on a fiduciary responsibility to fine-tune your strategy/portfolio on an ongoing basis, and they are there to help manage behavior to make sure you can stick to your strategy.”

How much does a financial advisor cost?

This depends on which advisor you choose. Each one can choose a different method of charging for their services and what services are included in that price.

Percentage of Assets

If the advisor is managing assets for you, you are charged a fee that is typically a small percentage of the assets the advisor is managing.

There are both fee-only advisors and fee-based advisors. If they are a fee-only advisor, this percentage of your assets is all they can make from you. However, if they are a fee-based advisor, they may also be able to collect commissions on certain products they sell.

Variations of this method include charging a percentage of your net worth or your adjusted gross income.

Commissions

On the sale of specific products, the advisor is paid a commission from the financial or insurance products you purchase from them.

Financial Plans

With a fee-based financial plan, you pay a specific amount at predetermined intervals for ongoing financial advice from your advisor.

After a consultation to understand your financial situation, the advisor can tell you the financial planning fee and what it covers.

“An annual financial planning fee can range from $1,000 to $10,000 depending on the complexity of a plan,” says Burgess.

This fee will not be affected by investment growth or commissions, so you should to get advice suited for you.

Specialized Financial PLan

In this case, you are paying based on an hourly rate determined by the scope of the services being provided.

While you can feel confident that you are getting objective advice since the hourly rate is not tied to specific products, you may see less success.

Is a financial advisor right for you?

When you’re ready for individual help managing your wealth and protecting yourself and your family financially, a financial advisor is a good place to start.

“If you desire customized and detailed advice, where you have ownership throughout the process, but want to be educated and empowered by a knowledgeable professional, then a financial advisor may be right for you,” says Tietel.

In most cases, an advisor will act as your finance coach, building a relationship with you through changes in your life (marriage, children, retirement, etc.) and uncertainty in the market, and helping you make a sound financial decisions for you based on your values and goals.

“An advisor is the right choice if you want real-life wisdom and ongoing personal guidance pertaining to your specific situation—often branching out much further than a portfolio,” says Burgess.

The key is to find an advisor who you like and who understands your needs. North Star works with 150+ financial advisors in 23 states, so you can find the right fit for you based on your needs.

Start Your Advisor Search

About Joe Burgess, CFP®, AIF®, CLU, ChFC and Moxie Wealth Management

joe-burgess.jpgJoe has served clients as a wealth advisor for his entire professional career. In 2015, Joe founded Moxie Wealth Management* in Minneapolis with his business partner Kristin Brandli Printon in an effort to brand a practice based on their unique values-based approach to financial planning.

When not hard at work, Joe loves to spend time with his wife and three children. As an avid outdoorsman, he spends a lot of time on his road bike in summer and takes annual trips to the Boundary Waters Canoe Area (BWCA) for camping and fishing with friends.

*Moxie Wealth Management is an affiliate of North Star Resource Group

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About Nicole Winter Tietel, LUTCF and Winter & Associates, Inc.

tietel-nicole.jpgNicole has been helping her clients protect, accumulate and distribute their wealth for over 20 years. She is the fourth generation and first woman to lead the Winter & Associates, Inc. team.

Nicole is devoted to serving her community and industry. She is a member of the Junior League of St. Paul, former Development Chair and board member of Dodge Nature Center and past treasurer of the St. Paul Academy Lower School Parent's Association. Her latest community endeavor has her teaching a six-hour financial education course to individuals nearing retirement.

*Winter & Associates, Inc. is a partner firm of North Star Resource Group

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1O'Shea, A. (2019, September 13). What Is a Robo-Advisor and Is One Right for You? Retrieved from https://www.nerdwallet.com/blog/investing/what-is-a-robo-advisor/.

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