September 30, 2018
Every week, Simply Money’s Nathan Bachrach, Ed Finke and Amy Wagner are answering your financial questions. If you, a friend, or someone in your family has a money issue or problem, please feel free to send those questions to firstname.lastname@example.org
Judy and Carl from Deer Park: We’re about 6 years from retirement and are thinking about hiring a financial advisor. What should we be looking for?
Answer: We’re glad you’re asking this question because, truthfully, pretty much anyone can call themselves a “financial advisor.” But you probably don’t want just anyone managing your life savings, right?
We’re guessing you’ve probably told yourself that you want someone you can trust, and while that’s a valid qualification, there should be more to your search than just going off of a “gut” feeling. We would suggest looking for someone who’s a “fiduciary” (meaning they’ll put your best interests ahead of their own), someone who has a thorough knowledge of the rules and regulations of the financial services industry, and someone who’s earned well-respected credentials, such as the CERTIFIED FINANCIAL PLANNER™ or Chartered Financial Consultant® designation.
One of the best ways to check-off all (or most) of those criteria is to work with an independent, fee-only advisor. First let’s explain “independent.” If someone is an independent advisor, it means the advice he or she is giving you isn’t motivated by outside influences such as sales quotas or commissions. Moreover, it means the advisor isn’t limited to only being able to offer you a limited family of funds or investments.
As for “fee-only,” this type of advisor should be offering you advice and guidance for a percentage of your assets they manage (not commissions). This compensation model matters because it gives you clarity. You should always know precisely what your advisor charges, along with how that amount is calculated. There should never be any surprises or hidden fees. Independent advisors, and those who offer a fee-based compensation model, typically go hand-in-hand.
The Simply Money Point is that you deserve to work with a financial advisor who is properly credentialed, thoroughly trained, and always willing to put your best interests first. To begin your search, a free tool such as BrokerCheck.org is a good starting point.
Dave in Monfort Heights: I’m thinking about buying a new house. Does a fixed-rate mortgage or an adjustable-rate mortgage make more sense right now?
Answer: The deciding factor for this question comes down to interest rates trends, but first, let’s back up for a moment for a quick refresher on the difference between these two types of mortgages.
A fixed-rate mortgage allows you to “lock-in” a set interest rate for the life of the loan. So, for instance, if you were to get a 30-year mortgage right now, you would pay about 4.88 percent in interest until you paid off the loan (this is the current national average for a 30-year mortgage according to BankRate.com). The big benefit is that your monthly payments will never change. However, if rates fall, you would have to refinance to take advantage.
An adjustable-rate mortgage works just as it sounds: the interest rate will vary over the life of the loan. In most cases, you’ll have a fixed rate for the first few years of the loan, but then the lender can adjust it every year. Sure, you can get lucky if interest rates are trending down, but if interest rates rise, will your budget be able to handle the higher monthly payment? The “unknown” is the biggest downside with this kind of mortgage.
It’s also important to look at overall macro-economic trends. Historically, we’re still in a very low interest rate environment. Since 1971, the highest rate for a 30-year fixed mortgage was 18.63 percent in October 1981. The lowest was 3.31 percent in November 2012. So, a current national average of 4.88 percent isn’t that far from the bottom. Additionally, the Federal Reserve (our nation’s central bank) is continuing to raise short-term interest rates, meaning mortgage rates could follow.
Here’s The Simply Money Point: While everyone’s situation is different, in most cases a fixed mortgage is the better option due to the simple fact your monthly payment will stay steady. A fixed rate especially makes even more sense right now given rates are low (historically speaking) and probably on the rise.
Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Nathan Bachrach and Ed Finke and their team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or email@example.com.