MONEY IRAs

The Best Way to Tap Your IRA In Retirement

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: I am 72 years old and subject to mandatory IRA withdrawals. I don’t need all the money for my expenses. What should I do with the leftover money? Jay Kahn, Vienna, VA.

A: You’re in a fortunate position. While there is a real retirement savings crisis for many Americans, there are also people with individual retirement accounts (IRAs) like you who don’t need to tap their nest egg—at least not yet.

Nearly four out of every 10 U.S. households own an IRA, holding more than $5.7 trillion in these accounts, according to a study by the Investment Company Institute. At Vanguard, 20% of investors with an IRA who take a distribution after age 70 ½ put it into another taxable investment account with the company.

The government forces you to start withdrawing your IRA money when you turn 70½ because the IRS wants to collect the income taxes you’ve deferred on the contributions. You must take your first required minimum distribution (RMD) by April of the year after you turn 70½ and by December 31 for subsequent withdrawals.

But there’s no requirement to spend it, and many people like you want to continue to keep growing your money for the future. In that case you have several options, says Tom Mingone, founder and managing partner of Capital Management Group of New York.

First, look at your overall asset allocation and risk tolerance. Add the money to investments where you are underweight, Mingone advises. “You’ll get the most bang for your buck doing that with mutual funds or an exchange traded fund.“

For wealthier investors who are charitably inclined, Mingone recommends doing a direct rollover to a charity. The tax provision would allow you to avoid paying taxes on your RMD by moving it directly from your IRA to a charity. The tax provision expired last year but Congress has extended the rule through 2014 and President Obama is expected to sign it.

You can also gift the money. Putting it into a 529 plan for your grandchildren’s education allows it to grow tax free for many years. Another option is to establish an irrevocable life insurance trust and use the money to pay the premiums. With such a trust, the insurance proceeds won’t be considered part of your estate so your heirs don’t pay taxes on it. “It’s a tax-free, efficient way to leave more to your family,” Mingone says.

Stay away from immediate annuities though. “It’s not that I don’t believe in them, but when you’re already into your 70s, the risk you’ll outlive your capital is diminished,” says Mingone. You’ll be locking in a chunk of money at today’s low interest rates and there’s a shorter period of time to collect. “It’s not a good tradeoff for guaranteed income,” says Mingone.

Beyond investing the extra cash, consider just spending it. Some retirees are reluctant to spend the money they’ve saved for retirement out of fear of running out later on. With retirements that can last 30 years or more, it’s a legitimate worry. “Believe it or not, some people have a hard time spending it down,” says Mingone. But failure to enjoy your hard-earned savings, especially while you are still young enough and in good health to use it, can be a sad outcome too.

If you’ve met all your other financial goals, have some fun. “There’s something to be said for knocking things off the bucket list and enjoying spending your money,” says Mingone.

Update: This story was changed to reflect the Senate passing a bill to extend the IRS rule allowing the direct rollover of an IRA’s required minimum distribution to a charity through 2014.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com

Read next: How Your Earnings Record Affects Your Social Security

MONEY exchange-traded funds

Why Index Funds Are Like Cheap TVs at Walmart

"Why are you window shopping?" Sale inside sign on store window
jaminwell—Getty Images

You can get a great deal on exchange-traded funds tracking large stock indexes. But watch out for the extra spending that can pile up.

Every industry has its loss leaders, and the investment world is no different. The theory is that you will go to the store for the $12 turkey and stick around to buy dressing, cranberries, juice, pies and two kinds of potatoes.

In the investment world, the role of the cheap turkey is played by broad stock index exchange traded funds. While investment firms say they make money on even low-fee funds, their profit margins on these products have been narrowing.

There’s been a bidding war among issuers of exchange traded funds that mimic large stock indexes like the Standard & Poor’s 500 or the Wilshire 5000 stock index. Companies including Blackrock, Vanguard, and Charles Schwab have been competing to offer investors the lowest cost shares possible on these products. Right now, Schwab — which will begin offering pre-mixed portfolios of ultra-low-cost ETFs early in 2015 — is winning.

Their theory? You’ll come in the door for the index ETF and stay for the more expensive funds, the alternative investments, the retirement advice.

“We believe we will keep that client for a long time,” said John Sturiale, senior vice president of product management for Charles Schwab Investment Management.

Investors, of course, are free to come in and buy the cheap TV and nothing more. Here are some points to consider if you want to squeeze the most out of low-cost exchange traded funds.

A few points don’t matter, but a lot of points do.

“Over the long term, cost is one of the biggest determinants of portfolio performance,” said Michael Rawson, a Morningstar analyst.

If you have a TD Ameritrade brokerage account, you can buy the Vanguard Total Stock Market Index Fund ETF for no cost beyond annual expenses of 0.05% of your assets in the fund. At Schwab, you can buy the Schwab U.S. Broad Market ETF for an annual expense of 0.04%. That 0.01 percentage point difference is negligible.

But compare that low-cost index fund with an actively managed fund carrying 1.3% in expenses. Invest $50,000 at the long-term stock market average return of 10% and you’ll end up with $859,477 after 30 years of having that 0.05% deducted annually. Pay 1.3% a year in expenses instead (not unusual for a high-profile actively managed mutual fund) and you’ll end up with $589,203. You’ll have given up $270,274 in fees, according to calculations performed at Buyupside.com.

Don’t pay for advice you don’t need.

The latest trend in investment advice is to charge clients roughly 1% of all of their assets to come up with a broad and diversified portfolio — with index funds at their core. Why not just buy your own core of index funds and exchange traded funds directly, and then get advice on the trickier parts of your portfolio? Or pay an adviser a onetime fee to develop a mostly index portfolio that you can buy on your own?

You won’t give up performance.

High-priced actively managed large stock funds as a group do not typically beat their indexes over time. Even those star managers who do outperform almost never do so year after year after year.

Build a broad portfolio.

Not every category of investment lends itself to low-cost indexing. You may do better with a seasoned stock picker if you’re taking aim at small-growth stocks, for example. But you can make the core of your plan a diversified and cheap portfolio of ETFs at any of the aforementioned companies, and save your fees for those extras that will really add value — the gravy, if you will.

MONEY

Schwab’s Pitch to Millennials: Talk to (Robot) Chuck

Charles Schwab Corp. courts young investors with low-cost online financial advice.

Charles Schwab Corp. became an icon of the 1980s and ’90s bull market by helping individual investors make cheap stock trades.

Schwab made a smart bet that people were willing to research and pick stocks without the advice of a broker, if only they were given the technology (first just the telephone, and later online) to do it for themselves. But the new generation of investors is already comfortable with technology—what they’re increasingly wary of is picking stocks.

Enter the so-called “robo-advisers,” investment firms that rely on computer algorithms to help investors pick a slate of mutual or exchange-traded funds, typically for a lower cost than traditional advisers. Companies like Betterment and Wealthfront have gained thousands of clients and millions in start-up money, hoping that they might become, essentially, the Schwab of the millennial generation.

Not surprisingly, the actual Charles Schwab wants a piece of the action too.

On Monday the San Francisco discount brokerage unveiled its plan for a product called “Schwab Intelligent Porfolios,” which will launch in the first quarter of 2015.

Schwab isn’t the only investment incumbent to try to jump on this trend. Vanguard has been running a pilot version of a program that takes a similar approach. Fidelity recently announced a venture with Betterment, one of the new upstart firms.

All the new web-driven advice services take for granted that many investors—already used to banking online, shopping on Amazon and sharing personal details on Facebook—will be willing to interact with a financial adviser only online or over the phone. In some cases, the services do away with the flesh-and-blood advisers altogether. Instead, a computer model creates a portfolio of stock and bond funds after a customers fill out an online questionnaire about their goals and risk tolerance. Just as with books and music, putting money advice online has been pushing costs down. Working with a traditional financial adviser, you might pay 1% or more assets per years in fees. Advisers like Wealthfront and Betterment charge less than 0.5%.

The new services also tend to be available to a wider group on investors, with minimum portfolios of $25,000 or less. Many traditional advisers look won’t work with clients unless they have at least ten times that amount.

How does Schwab’s planned new service compare the upstarts? The details about Intelligent Portfolios are still a bit thin. Schwab describes the service as offering “technology-driven automated portfolios” but also says “live help from investment professionals” is available. Schwab is being aggressive on cost: It will not levy any asset-based fee at all, and will require as little as $5,000 to invest. Schwab says it will make money when Schwab’s own exchange-traded funds are included as investment recommendations, and from portfolios’ cash holdings which will be in Schwab bank products. Without knowing which ETFs Schwab ends up recommending, it’s difficult to get a sense of the total amount investors will pay. (Some Schwab ETFs are very low-cost, however.)

What is clear is that the new services have changed the game, pushing companies to get the sticker price for basic advice down as low as possible. For example, an older Schwab investment program, it’s ETF “managed portfolio,” allows investors to talk to advisers over the phone and in branches. It charges investors up to 0.9% of their assets a year.

MONEY 529 plans

Why the Best College Savings Plans Are Getting Better

stack of money under 5-2-9 number blocks
Jan Cobb Photography Ltd—Getty Images

Low-cost 529 college savings plans continue to rise to the top in Morningstar's latest ratings.

Competition is creating ever-better investment options for parents who want to save for their kids’ college costs through tax-preferred 529 college savings plans, according to Morningstar’s annual ratings of the 64 largest college savings plans.

In a report released today, the firm gave gold stars to 529 plans featuring funds managed by T. Rowe Price and Vanguard. The Nevada 529 plan, for example, which offers Vanguard’s low-cost index funds, has long been one of Morningstar’s top-rated college savings options. The plan became even more attractive this year when it cut the fees it charges investors from 0.21% of assets to 0.19%, says Morningstar senior analyst Kathryn Spica.

“In general, the industry is improving” its offerings to investors, Spica adds.

You can invest in any state’s 529. In many states, however, you qualify for special tax breaks by investing in your home-state 529 plan. If you don’t, you should shop nationally, paying attention to fees and investment choices.

Morningstar raised Virginia’s inVEST plan, which offers investment options from Vanguard, American Funds and Aberdeen, from bronze to silver ratings, in part because Virginia cut its fees from 0.20% to 0.15% early this year.

Virginia’s CollegeAmerica plan continued as Morningstar’s top-rated option for those who pay a commission to buy a 529 plan through an adviser. American Funds, which manages the plan, announced in June it would waive some fees, such as set-up charges.

But there are exceptions. Morningstar downgraded two plans—South Dakota’s CollegeAccess 529 and Arizona’s Ivy Funds InvestEd 529 Plan—to “negative” because of South Dakota’s high fees and problems with Arizona’s fund managers.

Rhode Island’s two college savings plans moved off the negative list this year after the state started offering a new investment option based on Morningstar’s recommended portfolio of low-cost index funds. Given the potential conflict of interest, Morningstar did not rate the plans in 2014.

Joseph Hurley, founder of Savingforcollege.com, which also rates 529 plans, says he hasn’t analyzed the Morningstar-modeled funds because they are new and don’t have enough of a track record. But, he adds, the Rhode Island direct-sold 529 plan offers several low-cost index fund options.

Here are Morningstar’s top-rated 529 plans for 2014:

State Fund company Investment method Expenses (% of assets) for moderate age-based portfolio (ages 7 to 12) Five-year annualized return for moderate age-based portfolio (ages 7 to 12)
Alaska T. Rowe Price Active 0.88% 11.25%
Maryland T. Rowe Price Active 0.88% 11.42%
Nevada Vanguard Passive 0.19% 8.65%
Utah Vanguard Passive 0.22% 8.01%

Related:

 

 

 

MONEY Markets

Four Reasons Not to Worry About the Stock Market

Waterfall
Roine Magnusson—Getty Images

Take a deep breath and consider some historical context.

The funniest thing about markets is that all past crashes are viewed as an opportunity, but all current and future crashes are viewed as a risk.

For months, investors have been saying a pullback is inevitable, healthy, and should be welcomed. Now, it’s here, with the S&P 500 down about 10% from last month’s highs.

Enter the maniacs.

“Carnage.”

“Slaughter.”

“Chaos.”

Those are words I read in finance blogs this morning.

By my count, this is the 90th 10% correction the market has experienced since 1928. That’s about once every 11 months, on average. It’s been three years since the last 10% correction, but you would think something so normal wouldn’t be so shocking.

But losing money hurts more than it should, and more than you think it will. In his book Where Are the Customers’ Yachts?, Fred Schwed wrote:

There are certain things that cannot be adequately explained to a virgin either by words or pictures. Not can any description I might offer here ever approximate what it feels like to lose a chunk of money that you used to own.

That’s fair. One lesson I learned after 2008 is that it’s much easier to say you’ll be greedy when others are fearful than it is to actually do it.

Regardless, this is a critical time to pay attention as an investor. One of my favorite quotes is Napoleon’s definition of a military genius: “The man who can do the average thing when all those around him are going crazy.” It’s the same in investing. You don’t have to be a genius to do well in investing. You just have to not go crazy when everyone else is, like they are now.

Here are a few things to keep in mind to help you along.

Unless you’re impatient, innumerate, or an idiot, lower prices are your friend

You’re supposed to like market plunges because you can buy good companies at lower prices. Before long, those prices rise and you’ll be rewarded.

But you’ve heard that a thousand times.

There’s a more compelling reason to like market plunges even if stocks never recover.

The psuedoanonymous blogger Jesse Livermore asked a smart question this year: Would you rather stocks soared 200%, or fell 66% and stayed there forever? Literally, never recovering.

If you’re a long-term investor, the second option is actually more lucrative.

That’s because so much of the market’s long-term returns come from reinvesting dividends. When share prices fall, dividend yields rise, and the compounding effect of reinvesting dividends becomes more powerful. After 30 years, the plunge-and-no-recovery scenario beats out boom-and-normal-growth market by a quarter of a percentage point per year.

On that note, the S&P 500’s dividend yield rose from 1.71% in September to 1.82% this week. Whohoo!

Plunges are why stocks return more than other assets

Imagine if stocks weren’t volatile. Imagine they went up 8% a year, every year, with no volatility. Nice and stable.

What would happen in this world?

Nobody would own bonds or cash, which return about zero percent. Why would you if you could earn a steady, stable 8% return in stocks?

In this world, stock prices would surge until they offered a return closer to bonds and cash. If stocks really had no volatility, prices would rise until they yielded the same amount as FDIC-insured savings accounts.

But then — priced for perfection with no room for error — the first whiff of real-world realities like disappointing earnings, rising interest rates, recessions, terrorism, ebola, and political theater sends them plunging.

So, if stocks never crashed, prices would rise so high that a new crash was pretty much guaranteed. That’s why the whole history of the stock market is boom to bust, rinse, repeat. Volatility is the price you have to be willing to pay to earn higher returns than other assets.

They’re not indicative of the crowd

It’s easy to watch the market fall 500 points and think, “Wow, everyone is panicking. Everyone is selling. They know something I don’t.”

That’s not true at all.

Market prices reflect the last trade made. It shows the views of marginal buyers and marginal sellers — whoever was willing to buy at highest price and sell at the lowest price. The most recent price can represent one share traded, or 100,000 shares traded. Whatever it is, it doesn’t reflect the views of the vast majority of shareholders, who just sit there doing nothing.

Consider: The S&P fell almost 20% in the summer of 2011. That’s a big fall. But at Vanguard — one of the largest money managers, with more than $3 trillion — 98% of investors didn’t make a single change to their portfolios. “Ninety-eight percent took the long-term view,” wrote Vanguard’s Steve Utkus. “Those trading are a very small subset of investors.”

A lot of what moves day-to-day prices are computers playing pat-a-cake with themselves. You shouldn’t read into it for meaning.

They don’t tell you anything about the economy

It’s easy to look at plunging markets and think it’s foretelling something bad in the economy, like a recession.

But that’s not always the case.

As my friend Ben Carlson showed yesterday, there have been 13 corrections of 10% or more since World War II that were not followed by a recession. Stocks fell 35% in 1987 with no subsequent recession.

There is a huge disconnect between stocks and the economy. The correlation between GDP growth and subsequent five-year market returns is -0.06 — as in no correlation whatsoever, basically.

Vanguard once showed that rainfall — yes, rainfall — is a better predictor of future market returns than trend GDP growth, earnings growth, interest rates, or analyst forecasts. They all tell you effectively nothing about what stocks might do next.

So, breathe. Go to the beach. Hang out with your friends. Stop checking your portfolio. Life will go on.

For more on this topic:

Check back every Tuesday and Friday for Morgan Housel’s columns. Contact Morgan Housel at mhousel@fool.com. The Motley Fool has a disclosure policy.

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MONEY 401(k)s

The Secret To Building A Bigger 401(k)

Ostrich egg in nest
Brad Wilson—Getty Images

There's growing evidence that financial advice makes a big difference in your ability to achieve a comfortable retirement.

Some people need a personal trainer to get motivated to exercise regularly. There’s growing evidence that a financial coach can help whip your retirement savings into better shape too.

People in 401(k) plans who work with financial advisors save more and have clearer financial goals than people who don’t use professional advice, according to a study out today by Natixis Global Asset Management. Workers with advisors contribute 9.5% of their annual salary to their 401(k) vs. 7.8% by those who aren’t advised, according to Natixis. That puts workers with advisors on target for the 10% to 15% of your annual income you need to put away (including company match) if you want to retire comfortably.

Natixis also found that three-quarters of 401(k) plan participants with advisors say they know what their 401(k) balance should be by the time they retire vs. half of workers without advisors who say the same.

The Natixis study follows a Charles Schwab survey out last week that found that workers who used third-party professional advisors and had one-on-one counseling tended to increase their savings rate, were better diversified and stayed the course in their investing decisions despite market ups and downs.

Similar research was released in May by Financial Engines—that study found that people who got professional investment help through managed accounts, target-date funds or online tools earned higher median annual returns than those who go it alone. On average employees getting advice had median annual returns that were 3.32 percentage points higher, net of fees, than workers managing their own retirement accounts.

Granted, most of these studies come from organizations that make money by providing advice—either directly to investors or as a resource provided by 401(k) plan providers. Still, Vanguard, who provides services to both advisers and do-it-yourself investors, has published research showing that financial guidance can add value. In a 2013 research paper, Advisor’s Alpha, Vanguard said that “left alone, investors often make choices that impair their returns and jeopardize their ability to fund their long-term objectives.” According to Vanguard, advisers can help add value if they “act as wealth managers and behavioral coaches, providing discipline and experience to investors who need it.”

In other words, the value of working with an advisor, like a personal trainer, may simply be that when someone is working one-on-one with you to reach a goal you are more likely to be engaged.

Whether you want to work with a financial advisor is a personal decision. If you’re like many people who feel overwhelmed by investment choices, or don’t have a lot of time to spend on investment decisions, getting professional financial advice can help you stay on course towards your retirement goals. You can get that advice through your 401(k) plan or via a periodic check up with a fee-only financial planner or simply by putting your retirement funds into a target date fund.

Still, before you hire a pro, make sure you understand the fees. A recent study by the GAO found that 401(k) managed accounts, which let you turn over portfolio decisions to a pro, may be costly—management fees ranged from .08% to as high as 1%, on top of investing expenses. Ideally, you should pay 0.3% or less. High fees could wipe out the advantage of professional guidance.

Other research has found that you may get similar benefits—generally at a much lower cost—by opting for a target-date fund. If you go outside your 401(k) plan, it’s generally better to use a fee-only planner, who gets paid only for the advice provided, not commissions earned by selling financial products. You can find fee-only financial planners through the National Association of Personal Financial Advisors; and for fee-only planners who charge by the hour, you can try Garrett Planning Network.

Still, if you enjoy investing, and you are willing to spend the time needed to stay on top of your finances, a do-it-yourself approach is fine. Using online calculators can give you a clearer picture of your goals, and simply knowing what your target should be can be motivating. The Employee Benefit Research Institute (EBRI) consistently finds that people who calculated a savings goal were more than twice as likely to feel very confident they’ll be able to accumulate the money they need to retire and are more realistic about how much they need to save. All of which will help you reach your retirement goals.

MONEY retirement planning

3 Smart Moves for Retirement Investors from the Bogleheads

The Bogleheads Guide to Investing 2nd Edition
Wiley

A group of Vanguard enthusiasts offers sound financial advice to other ordinary investors. Here are three tips from one of their founders.

Wouldn’t be great to get advice on managing your money from a knowledgeable friend—one who isn’t trying to rake in a commission or push a bad investment?

That’s what the Bogleheads are all about. These ordinary investors, who follow the teachings of Vanguard founder Jack Bogle, offer guidance, encouragement and investing opinions at their website, Bogleheads.org. The group started back in 1998 as the Vanguard Diehards discussion board at Morningstar.com. As interest grew, the Bogleheads split off and launched an independent website. Today the Bogleheads have nearly 40,000 registered members, but millions more check into the site each month. (You don’t have to be member to read the posts but you must register to comment—it’s free.)

As you would expect given their name, the Bogleheads favor the investing principles advocated by Bogle and the Vanguard fund family: low costs, indexing (mostly), and buy-and-hold investing—though the members disagree on many details. The Bogleheads are led by a core group of active members, who have also published books, helped establish local chapters around the country, and put together an annual conference. Their ranks of regular commenters include respected financial pros such as Rick Ferri, Larry Swedroe, William Bernstein, Wade Pfau, and Michael Piper.

For investors who prefer their advice in a handy, non-virtual format, a new edition of “The Bogleheads’ Guide to Investing,” a best-seller originally published in 2006, is coming out this week. Below, Mel Lindauer, who co-wrote the book with fellow Bogleheads Taylor Larimore and Michael LeBoeuf, shares three of the most important moves that retirement investors need to make.

Choose the right risk level. Figuring out which asset allocation you can live with over the long term is essential—and that means knowing how much you can comfortably invest in stocks. Consider the 37% plunge in the stock market in 2008 during the financial crisis. Did you hold on your stock funds or sell? If you panicked, you should probably keep a smaller allocation to equities. Whatever your risk tolerance, it helps to tune out the market noise and stay focused on the long term. “That’s one of the main advantages of being a Boglehead—we remind people to stay the course,” says Lindauer.

Keep it simple with a target-date fund. These portfolios give you an asset mix that shifts to become more conservative as you near retirement. Some investing pros argue that a one-size-fits-all approaches has drawbacks, but Lindauer sees it differently, saying “These funds are an ideal way for investors to get a good asset mix in one fund.” He also likes the simplicity—having to track fewer funds makes it easier to monitor your portfolio and stay on track to your goals.

Another advantage of target-dates is that holding a diversified portfolio of stocks and bonds masks the ups and downs of the market. “If the stock market falls more than 10%, your fund may only fall 5%, which won’t make you panic and sell,” says Lindauer. But before you opt for a fund, check under hood and be sure the asset mix is geared to your risk level—not all target-date funds invest in the same way, with some holding more aggressive or more conservative asset mixes. If the fund with your retirement date doesn’t suit your taste for risk, choose one with a different retirement date.

Don’t overlook inflation protection. Given the low rates that investors have experienced for the past five years—the CPI is still hovering around 2%—inflation may seem remote right now. But rising prices remain one of the biggest threats to retirement investors, Lindauer points out. If you start out with a $1,000, and inflation averages 3% over the next 30 years, you would need $2,427 to buy the same basket of goods and services you could buy today.

That’s why Lindauer recommends that pre-retirees keep a stake in inflation-protected bonds, such as TIPs (Treasury Inflation-Protected Securities) and I Bonds, which provide a rate of return that tracks the CPI. Given that inflation is low, so are recent returns on these bonds. Still, I Bonds “are the best of a bad lot,” Lindauer says. Recently these bonds paid 1.94%, which beats the average 0.90% yield on one-year CDs. If rates rise, after one year you can redeem the I Bond; you’ll lose three months of interest, but you can then buy a higher-yielding bond, Lindauer notes. Consider them insurance against future spikes in inflation.

More investing advice from our Ultimate Retirement Guide:
What’s the Right Mix of Stocks and Bonds?
How Often Should I Check on My Retirement Investments?
How Much Money Will I Need to Save?

MONEY financial advice

Where to Go for the Best Financial Advice

Wall of paint chips
Carolyn Hebbard—Getty Images/Flickr Open

Seeking help with investments or retirement planning? Here's how to sort through the overwhelming number of options you face.

The financial advice business is changing dramatically in every aspect, from how advisers spend their time, to what they charge, to how they label and promote themselves.

The result? Further confusion for consumers who probably sought help to find clarity in the first place.

“Brokers” who used to pick stocks and sell mutual funds at firms like Morgan Stanley and Bank of America Merrill Lynch are now more likely now to call themselves “financial advisers” and manage portfolios for fees instead of (or in addition to) commissions.

Independents who used to offer comprehensive advice are now more likely to focus on investment management and call themselves “wealth managers.”

Charles Schwab, the online brokerage that made its name catering to do-it-yourself investors, now is pushing its own stable of are “financial consultants” and preaching the value of face-to-face (or at least Skype-to-Skype) connections.

New to the scene are “robo-advisers” — algorithmically driven online money management firms that will automate your investment decisions.

Further complicating consumer choice is the fact that most firms have a variety of ways in which they offer financial advice to clients.

At Vanguard, for example, a firm which promotes simplicity in investing, there are nine different advice platforms. They vary, based on whether a client is investing through a retirement account or directly, how much advice a client needs or wants, and how much money the client has to invest.

How can someone seeking financial advice navigate their way through this complex field and make sure they get the right advice? Here are a few things you should know now:

Needs Assessment

Assess your own needs. The first step is to figure out what you want a financial professional to do for you. Do you want comprehensive investment management? A whole-life plan that includes everything from how to pay for college to tax reduction to retirement planning? Just a reality check on your retirement readiness?

Pay for What You Eat

Once you know what you want, it’s easier to find the right adviser. For a spot check or limited amount of planning, consider hiring a by-the-hour adviser — you can find one through the Garrett Planning Network (www.garrettplanningnetwork.com).

Want a comprehensive soup-to-nuts life financial plan? Look for a fee-only certified financial planner through the CFP Board of Standards (www.cfp.net) or the National Association of Personal Financial Advisors (www.napfa.org).

Learn the Lingo

“Fee only” means that the adviser is not paid to sell products and, if that person is a certified financial planner, it also means she doesn’t even own a small share in a financial company that does sell products.

“Fee-based” is a meaningless term of art, typically used by advisers who charge fees and reap commissions.

Watch Your Wallet

There’s a huge discrepancy in the amount of fees advisers charge.

At Vanguard, investors willing to stick with Vanguard funds can get basic fund choice advice for free and a comprehensive financial plan for 0.3% of the assets they invest with Vanguard.

Traditional brokerage firms will offer broader portfolios and go fee-only but at costs that can top 2% a year.

In the middle are most independent financial advisers, who tend to charge fees near 1% of assets, more for small accounts and less for bigger ones.

An extra percent or two, pulled from an account every year, can cost a long-term investor hundreds of thousands of dollars at the end of the day, so fees do matter.

Consider Generic Advice

A lot of lip service is given to selling the idea that everyone needs personalized and customized financial advice.

That’s true for people who have ultra-high net worth, with businesses, estates, tax issues and the like to manage. It’s also true of people who have very special situations, such as handicapped children who will need lifelong care.

But it may not be true of the average Joe and Jane, who simply need tips on how to invest their 401(k) or IRA fund.

Companies like T. Rowe Price, Vanguard and Fidelity will give you basic fund guidance for free, or close to it.

Remember the Robots

Companies like Wealthfront, Betterment and Hedgeable will invest your money for you in diversified portfolios regularly rebalanced and managed, if you need that, to minimize taxes.

They will charge pennies on the dollar of what a face-to-face individualized money manager will charge, and in some cases offer that for free.

They offer a reasonable solution for investors who know how much they have to invest, don’t need hand-holding, and are comfortable turning their finances over to an algorithm and sticking with passive index-linnked investing.

Here’s encouragement: Over long swaths of time, those passively-managed portfolios tend to beat the active investment managers.

MONEY IRAs

This Simple Move Can Boost Your Savings by Thousands of Dollars

Stack of Money
iStock

Last-minute IRA savers and those who keep their money in cash are paying a procrastination penalty.

Individual Retirement Account contributions are getting larger—an encouraging sign of a recovering economy and improved habits among retirement savers.

But there is an “I” in IRA for a reason: investors are in charge of managing their accounts. And recent research by Vanguard finds that many of us are leaving returns on the table due to an all-too-human fault: procrastination in the timing of our contributions.

IRA savers can make contributions anytime from Jan. 1 of a tax year up until the tax-filing deadline the following April. But Vanguard’s analysis found that more than double the amount of contributions is made at the deadline than at the first opportunity—and that last-minute contributions dwarf the amounts contributed throughout the year. Fidelity Investments reports similar data—for the 2013 tax year, 70% of total IRA contributions came in during tax season.

Some IRA investors no doubt wait until the tax deadline in order to determine the most tax-efficient level of contribution; others may have cash-flow reasons, says Colleen Jaconetti, a senior investment analyst in the Vanguard Investment Strategy Group. “Some people don’t have the cash available during the year to make contributions, or they wait until they get their year-end bonus to fund their accounts.”

Nonetheless, procrastination has its costs. Vanguard calculates that investors who wait until the last minute lose out on a full year’s worth of tax-advantaged compounded growth—and that gets expensive over a lifetime of saving. Assuming an investor contributes the maximum $5,500 annually for 30 years ($6,500 for those over age 50), and earns 4% after inflation, procrastinators will wind up with account balances $15,500 lower than someone who contributes as early as possible in a tax year.

But for many last-minute savers, even more money is left on the table. Among savers who made last-minute contributions for the 2013 tax year just ahead of the tax-filing deadline, 21% of the contributions went into money market funds, likely because they were not prepared to make investing decisions. When Vanguard looked at those hasty money market contributions for the 2012 tax year, two-thirds of those funds were still sitting in money market funds four months later.

“They’re doing a great thing by contributing, and some people do go back to get those dollars invested,” Jaconetti says. “But with money market funds yielding little to nothing, these temporary decisions are turning into ill-advised longer-term investment choices.”

The Vanguard research comes against a backdrop of general improvement in IRA contributions. Fidelity reported on Wednesday that average contributions for tax year 2013 reached $4,150, a 5.7% increase from tax year 2012 and an all-time high. The average balance at Fidelity was up nearly 10% year-over-year to $89,100, a gain that was fueled mainly by strong market returns.

Fidelity says older IRA savers racked up the largest percentage increases in savings last year: investors aged 50 to 59 increased their contributions by 9.8%, for example—numbers that likely reflect savers trying to catch up on nest egg contributions as retirement approaches. But young savers showed strong increases in savings rates, too: 7.7% for savers aged 30-39, and 7.3% for those aged 40-49.

Users of Roth IRAs made larger contributions than owners of traditional IRAs, Fidelity found. Average Roth contributions were higher than for traditional IRAs across most age groups, with the exception of those made by investors older than 60.

But IRA investors of all stripes apparently could stand a bit of tuning up on their contribution habits. Jaconetti suggests that some of the automation that increasingly drives 401(k) plans also can help IRA investors. She suggests that IRA savers set up regular automatic monthly contributions, and establish a default investment that gets at least some level of equity exposure from the start, such as a balanced fund or target date fund.

“It’s understandable that people are deadline-oriented,” Jaconetti says. “But with these behaviors, they could be leaving returns on the table.”

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MONEY ETFs

Hot Money Flows into Energy and Bonds

Dollar sign in flames
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Sometimes it pays to follow the crowd. At other times, you'll get burned.

All too often, I see investors heading in the wrong direction en masse. They buy stocks at the top of the market or bonds when interest rates are heading up.

Occasionally, though, active investors may be heading in the right direction. A case in point has been the flow of money into certain exchange-traded funds in the first half of this year.

Reflecting most hot money trends, billions of dollars moved because of headlines. The Energy Select SPDR ENERGY SELECT SECTOR SPDR ETF XLE 1.9201% exchange-traded fund, which I discussed three weeks ago, gathered more than $3 billion in assets in the first half, when crude oil prices climbed and demand for hydrocarbons remained high.

The Energy SPDR, which charges 0.16% for annual management expenses and holds Exxon Mobil EXXONMOBIL CORP. XOM 2.404% , Chevron CHEVRON CORP. CVX 2.8391% , and Schlumberger SCHLUMBERGER LTD. SLB 1.6289% , has climbed 22% in the past 12 months, with nearly one-third of that gain coming in the three months through July 18. Long-term, this may be a solid holding as developing countries such as China and India demand more oil.

“We think the Energy Select SPDR is a play of oil prices remaining high and supporting growth for integrated oil & gas and exploration and production companies,” analysts from S&P Capital IQ said in a recent MarketScope Advisor newsletter.

Headlines also favored European stocks as represented by the Vanguard FTSE Developed Markets ETF VANGUARD TAX MANAG FTSE DEVELOPED MKTS ETF VEA 1.7956% , which holds leading eurozone stocks such as Nestle, Novartis NOVARTIS AG NVS 2.4705% , and Roche. The fund has been the top asset gatherer thus far this year, with $4 billion in new money, according to S&P Capital IQ.

As Europe continues to recover over the next few years and the European Central Bank keeps rates low, global investors will continue to benefit from this growing optimism.

The Vanguard fund has gained nearly 16% for the 12 months through July 18. It charges 0.09% in annual expenses and is a solid holding if you have little or no European exposure in your stock portfolio.

Rate Hikes

Not all hot money trends make sense, however. As the economy accelerates and interest-rate hikes look increasingly likely, investors are still piling money into bond funds, which lose money under those circumstances.

The iShares 7-10 Year Treasury Bond ETF ISHARES TRUST 7-10 YEAR TREASURY BD ETF IEF -0.5638% , which holds middle-maturity U.S. Treasury bonds, continued to rank in the top 10 funds in terms of new money in the first half. The fund, which holds nearly $5 billion, is up nearly 4% for the 12 months through July 18, compared with 4.2% for the Barclays U.S. Aggregate Total return index, a benchmark for U.S. Treasuries. The fund charges 0.15% in annual expenses.

While investors were able to squeeze a bit more out of bond returns in the first half of this year, they may be living on borrowed time.

The U.S. Federal Reserve confirmed recently that it would be ending purchases of U.S. Treasury bonds and mortgage-backed securities in October. This stimulus program, known as “QE2,” has kept interest rates artificially low as the economy has had a chance to recover.

The phasing out of QE2 could be bearish for bond funds.

Will interest rates climb to reflect growing demand for credit and possibly higher inflation down the road? How will the ending of the Fed’s cheap money program affect U.S. and emerging markets shares?

Many pundits believe public corporations may pull back from their enthusiastic stock buybacks and trigger a correction. Yet low inflation and modest employment gains may mute bond market fears.

“The Fed is on track to complete tapering in the fourth quarter, and we think there is essentially no chance that it will move the fed funds rate higher this year,” Bob Doll, chief equity strategist with Nuveen Investments in Chicago, said in a recent newsletter.

“With the 10-year Treasury ending the quarter at 2.5%, the yield portion of this forecast is more uncertain,” Doll added, “although we expect yields will end the year higher than where they began.”

While there could be any number of wild cards spoiling the party for stocks, it is wise to ignore short-term trends and prepare for the eventual climb in interest rates.

That means staying away from bond funds with long average maturities along with vehicles like preferred stocks and high-yield bonds that are highly sensitive to interest rates.

Longer-term, shares of companies in consumer discretionary, materials and information technology businesses likely to benefit from a global economic resurgence will probably be a good bet.

Just keep in mind that the hot money can be wrong, so build a long-haul diversified portfolio that protects against the downside of a torrid trend going from hot to cold.

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