24 Aug I’m close to retirement. How do I pick a financial advisor?

Q. I am close to retirement. I intend to transfer my 401(k) from my previous employer to an IRA and I’m considering using an investment firm. How do I choose the right one? Also, what’s your advice on investing in exchange-traded funds versus mutual funds? In my current portfolio, it seems the ETFs bounce back faster than the managed funds.
— Almost there

A. Congratulations on nearing retirement, and on what can be both an exciting and challenging time.

You’re asking some big questions, and it sounds like sitting down with a financial advisor — not someone who sells investments, but someone who sells only advice — would be a smart move.

There are several important considerations to keep in mind when reviewing your options on working with a firm or specific advisor.

Paramount among these considerations is to ensure that the firm you choose to work with and the advisors employed by it have a fiduciary duty to you when managing your investments, said Charles Pawlik, a certified financial planner and chartered financial analyst with Beacon Trust in Morristown.

“Being bound by a fiduciary duty means that a firm/advisor has a legal obligation to act in your best interests when giving advice/recommending investments, as is the case with a Registered Investment Advisor (RIA),” Pawlik said. “This is in contrast to the suitability standard, which simply requires that investments are believed to be `suitable’ when recommended/sold to you, as is the case with brokers.”

He said the corollary to this is also to determine how an advisor is compensated. A fiduciary is typically paid a management or hourly fee to provide advice/manage your assets in your best interests. By contrast, brokers are typically compensated through commissions earned by selling you specific investment products, which can create conflicts as far as what is recommended to you, he said.

It is also important to review the experience and qualifications of the firm/advisors, and you’ll want to consider your overall needs relative to the services that a firm offers.

“Many firms only offer investment advice/provide investment management services, whereas others may offer advice/services relative to overall financial planning, tax planning and return preparation, and trust and estate matters, in addition to managing investments,” Pawlik said. “All of these aspects are important to consider as you approach retirement, and having all of these services coordinated to provide you comprehensive/cohesive advice under one roof has many benefits.”

As for your investment strategy, there are also several considerations to take into account.

Pawlik said it is important to first focus on determining what overall investment strategy and asset allocation is appropriate for you. This will depend on your long-term objectives, your willingness and ability to tolerate risk and your time horizon for the invested funds, among other items.

“Determining an appropriate and well-diversified asset allocation ties into doing broader financial planning, which projects your overall income, expenses and assets into the future to assist with determining what level of return you may need to earn on your assets to supplement other income sources in order to meet your needs in retirement,” he said. “An asset allocation that aims to achieve the average annual rate of return on your assets necessary to meet your needs, while minimizing the risk around investing for that level of return, can then be crafted by a qualified financial planner or portfolio manager.”

As for which investments to use, mutual funds, ETFs, individual stocks and bonds can all potentially be appropriate investments in the context of a diversified portfolio depending on your overall objectives. You’ll want to consider exposures to different markets such as domestic, international or emerging markets stock exposure, alternative investments such as real estate and commodities, and domestic and international bond exposure, he said.

On mutual funds versus exchange-traded funds, they are both typically a basket of stocks or bonds.

But ETFs have several differences relative to mutual funds in terms of their structure and how they trade, Pawlik said.

“For instance, ETFs trade throughout the day like stocks do, whereas mutual fund trades are affected at the end of each trading day,” he said.

Pawlik said the extent to which ETFs bounce back faster than mutual funds after a downturn in the market, and the overall long-term returns for an ETF or mutual fund for that matter, depend on the type of exposure that the ETF or mutual fund provides, the management team, fees and many other factors.

“As there are many considerations to take into account from both an individual investment as well as overall planning and investment strategy standpoint, working with a fiduciary to give you guidance on all of these fronts can be very beneficial in helping to optimize your financial situation to accomplish your goals heading into and during retirement,” he said.

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This story was originally published on Aug. 24, 2020.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.