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Dear Ms. MoneyPeace:
I have saved $100,000 in cash with the idea of making some changes. I don’t yet know what those changes should be.
I gave $60,000 to my financial adviser, who manages my 401(k). Of course, he just wants to raise the asset total to increase his income from his 1.5% management fee.
I would like three ideas of where to put the other $40,000 that is accessible if I find a one-year master’s-degree program, a new home or a lower-paying job versus my high-tech job. Something liquid but compounding interest and earning more than a bank savings account. I am thinking of a Vanguard index fund. I’m single, own a condo and have no children.
I thought of you as an alternative to my present financial adviser, as I want to diversify.
Cash on Hand Cathy
Send your questions to Ms. MoneyPeace: MsMoneyPeaceQuestions@MoneyPeace.com
Dear Cash Cathy:
Congratulations on being a good saver. You mentioned several options about where to put your money, and you expressed your feelings about your adviser.
Few advisers manage 401(k)s unless they are part of the brokerage firm that holds the assets. Companies’ 401(k) plans hire the investment manager to oversee the money and work with plan participants. Your company may have vetted the brokerage firm or adviser, but that does not mean they are a good fit for you. Do you trust them? Did you interview advisers before you hired them to manage your additional money? Is the adviser a fiduciary, meaning they are looking out for your best interests?
The 1.5% fee is very high. One percent is typical, which, beyond investment management, gets you advice on taxes, financial planning, estate planning and money management. Those fees are worth paying for if you are getting value from the relationship. Otherwise, you may be paying too much.
You show an understanding of the fee motivation. Nowhere do you mention your confidence of their advice and guidance. I sense a question mark on their ability. The fact that you are seeking my opinion shows it may be time to add another professional to your team, someone that you trust.
What stands out for me is the wording of your comment: “I gave $60,000 to my financial adviser.” Many people say this, sometimes demonstrating a lack of ownership of their money and a misunderstanding of their options. Advisers take direction from you. Knowing where your money is invested now is key to taking the next step with the balance of your savings. Remember, you asked that investment manager to oversee the money for you; you did not give it away. Ask more questions, get details and make conscious investment decisions. This is your money — and your life. You need to take responsibility for it.
For what you pay the current adviser annually, you could hire an objective, fee-only certified financial planner (CFP) for a couple of hours to review your investments. They could guide you from on the best way to invest or save your current funds.
As far as your next step in investing, that depends on how your other $60,000 is invested. The tried-and-true rule with money is that the sooner you are going to use it, the less risky places you want to keep it. With your plans up in the air, cash, certificates of deposit (CDs), credit unions and banks are most secure, despite low but rising interest rates. You can look beyond your local bank as national discount brokerage firms would help you set up an account and then purchase CDs, finding the best rates across the country.
A Vanguard index fund is low cost and yet many are stocks funds. Until you decide what changes you are making, putting that money in the stock market is a poor choice as the market is for the long term. There are some Vanguard funds, such as the Vanguard Limited-Term Tax-Exempt Fund
VMLTX,
that invest only in bonds.
If you might need the money in three to eight years, then bonds may be a good choice. Series I Savings Bonds, known as I Bonds, that are sold by the federal government are returning over 9%, but purchases are limited to $10,000.
What’s most important is to gain clarity on your life choices as you consider your financial options. I am unclear if you have not named them because you have not decided or may want money to do more than one. Consider working with a financial therapist so that your life goals match your financial goals.
Read: Skip these ‘free’ sources of financial advice — they will cost you dearly
On the investing side, being happy with your money and your life first will help you make better decisions. At this point I would refer to the wise person who years ago told me: “When in doubt, do nothing.”
CD Moriarty is a certified financial planner, a columnist for MarketWatch and a personal-finance speaker. She blogs at MoneyPeace.
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